Bellerive Homes Pty Ltd v FW Projects Pty Ltd

Supreme Court of NSW|2018-09-18|Before: Adams J

Judgment

By notice of motion filed on 3 August 2018, FW Projects Pty Ltd ("FW") seeks an order staying a judgment of this Court issued on 18 May 2018 requiring it to pay to Bellerive Homes Pty Ltd ("Bellerive") the amount of $1,166,550.71. The judgment was entered after Bellerive filed an adjudication certificate under the Building and Construction Industry Security of Payment Act 1999 (NSW) ("SOP Act"). As at the date of this judgment, the amount outstanding had not been paid nor had any payment of the outstanding amount been paid into Court.
The determination of this motion turns on whether FW has established on the available evidence that granting a stay of the judgment until the finalisation of specified proceedings between the parties in the Equity Division is necessary to prevent prejudice to FW in the context of the underlying purpose of the SOP Act and the "pay now argue later" scheme it established.

The hearing

The notice of motion came before me for hearing on 17 September 2018 in my capacity as Duty Judge. Mr Corsaro SC appeared for FW on the motion and Mr Leopold SC appeared for Bellerive with Mr Bhasin.
FW relied on two affidavits of Damian Gregory Ward, the solicitor for FW, sworn on 2 August 2018 and 22 August 2018 respectively and the annexures thereto as well as the financial records of Bellerive obtained in response to a notice to produce filed by FW on 29 August 2018. FW also provided an unsigned undertaking by FW to not dispose of, deal with or diminish the value of its assets in Australia to the unencumbered value of $1,166,550.71 pending the determination by the related proceedings.
One category of documents specified for production in the notice to produce filed by FW was "[a]ll contracts in existence or that currently bind the plaintiff for work or goods to be provided by the plaintiff or upon which the plaintiff has an exception of generating revenue or fees or income." Mr Corsaro invited Mr Leopold to confirm that no outstanding contracts had been provided by Bellerive pursuant to the notice to produce and he did so.
There was some brief cross-examination of Mr Ward by Mr Leopold as to the status of the proceedings brought by FW in the Equity Division. Mr Ward agreed that no evidence had been filed on those proceedings, no particulars sought or discovery given. Mr Ward stated that there was nothing outstanding on the part of FW insofar as the Court timetable was concerned. He accepted that there was a delay of two and a half months after the judgment on 18 May 2018 before this application for a stay was made.
Bellerive tendered two bank guarantees dated 21 December 2016 provided by National Australia Bank to FW on behalf of Bellerive (in the amount of $389,750 each), the adjudication judgment and a copy of the relevant D&C Contract between Bellerive and FW dated 1 November 2016. In addition, a signed undertaking by Bellerive to the Court was tendered. The terms of that undertaking are annexed to this judgment.
Both counsel had filed written submissions prior to the hearing and made oral submissions which I will summarise below. Towards the end of the hearing, Mr Leopold indicated that he would need to revisit his concession that there were no contracts to be produced pursuant to the notice to produce as he had just received instructions from his solicitor that there were in fact some contracts that might come within the scope of the notice to produce. In those circumstances, the proceedings were adjourned part-heard until the following day in order to give FW the opportunity to examine the additional material.
When the hearing resumed on 18 September 2018, a folder comprising 20 contracts was produced to the Court pursuant to the notice to produce on behalf of Bellerive. FW projects tendered a copy of these 20 contracts in its case.

The SOP Act

Before turning to consider the evidence and submissions of the parties, it is pertinent to have regard to the scheme established under the SOP Act to place the submissions and evidence in context. The Act has received considerable judicial consideration and was recently considered by the High Court in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 351 ALR 225; [2018] HCA 4 ("Probuild Constructions"). In the joint judgment of Kiefel CJ, Bell, Keane, Nettle and Gordon JJ, the scheme of the SOP Act was described at [4]-[18]. Rather than extract the relevant provisions of the Act here I propose instead to extract the summary of the relevant provisions of the Act from the High Court decision as follows: (footnotes and citations omitted): "[4] The object of the Security of Payment Act is "to ensure that any person who undertakes to carry out construction work (or who undertakes to supply related goods and services) under a construction contract is entitled to receive, and is able to recover, progress payments in relation to the carrying out of that work and the supplying of those goods and services". [5] The means by which the Security of Payment Act ensures that a person is entitled to a progress payment is by "granting a statutory entitlement to such a payment regardless of whether the relevant construction contract makes provision for progress payments". [6] The statutory entitlement to progress payments is provided for in s 8. "[P]rogress payment" is defined in s 4(1) to include the final payment for construction work carried out (or for related goods and services supplied) under a construction contract, a single or one-off payment for such work or supplies, and a "milestone payment" (a payment that is based on an event or date). [7] As explained in s 3(3), the procedure for recovering such a payment requires: (a) the making of a payment claim by the person claiming payment, and (b) the provision of a payment schedule by the person by whom the payment is payable, and (c) the referral of any disputed claim to an adjudicator for determination, and (d) the payment of the progress payment so determined. That procedure is set out in Pt 3 ("Procedure for recovering progress payments"). Section 13(1) provides that a person who is or who claims to be entitled to a progress payment (the "claimant") may serve a payment claim on the person who, under the construction contract concerned, is or may be liable to make a payment. The payment claim must identify the relevant construction work (or related goods and services) and the amount of the progress payment that the claimant claims to be due (the "claimed amount"). [8] Section 14(1) provides that a person on whom a payment claim is served (the "respondent") may reply to the claim by providing a payment schedule to the claimant. The payment schedule must indicate the amount of the payment (if any) that the respondent proposes to make (the "scheduled amount").5 If the scheduled amount is less than the claimed amount, the payment schedule must indicate why that is so and, if the respondent is withholding payment, the respondent's reasons for withholding payment. [9] If a claimant serves a payment claim on a respondent and the respondent does not provide a payment schedule within 10 business days (or earlier, if required by the construction contract), s 14(4) makes the respondent liable to pay the claimed amount on the due date for the progress payment. Any outstanding amount not paid on or before the due date is recoverable as a debt in a court of competent jurisdiction. The position is the same if the respondent provides a payment schedule but does not pay the scheduled amount by the due date. Alternatively, the claimant may apply in either case for adjudication of the payment claim.1 [10] Division 2 of Pt 3 deals with the adjudication of disputes. Section 17(1) provides: A claimant may apply for adjudication of a payment claim (an adjudication application) if: (a) the respondent provides a payment schedule under Division 1 but: (i) the scheduled amount indicated in the payment schedule is less than the claimed amount indicated in the payment claim, or (ii) the respondent fails to pay the whole or any part of the scheduled amount to the claimant by the due date for payment of the amount, or (b) the respondent fails to provide a payment schedule to the claimant under Division 1 and fails to pay the whole or any part of the claimed amount by the due date for payment of the amount. An adjudication application is to be made to an authorised nominating authority, which must refer the application to an adjudicator as soon as practicable. Where the respondent has failed to provide a payment schedule, an adjudication application cannot be made unless the claimant notifies the respondent, within 20 business days immediately following the due date for payment, of the claimant's intention to apply for adjudication of the payment claim and the respondent has been given an opportunity to provide a payment schedule to the claimant within five business days after receiving the claimant's notice. [11] The respondent may lodge with the adjudicator a response to the claimant's adjudication application only if the respondent provided a payment schedule within the time specified in s 14(4) or s 17(2)(b). That response must be lodged within five business days after receiving a copy of the application or two business days after receiving notice of the adjudicator's acceptance of the application, whichever is the later date. The response may contain submissions but it cannot include reasons for withholding payment that were not included in the payment schedule provided to the claimant. [12] Section 21(3) requires the adjudicator to determine an application "as expeditiously as possible" and, in any case, within 10 business days after the date on which the adjudicator notified the claimant and the respondent of acceptance of the application or within such further time as agreed by the parties. [13] Any proceedings to determine an adjudication application are conducted informally. They may be conducted by a conference and the parties are not entitled to legal representation at any such conference. [14] The task of the adjudicator is set out in s 22. Subsections (1) and (2) provide as follows: (1) An adjudicator is to determine: (a) the amount of the progress payment (if any) to be paid by the respondent to the claimant (the adjudicated amount), and (b) the date on which any such amount became or becomes payable, and (c) the rate of interest payable on any such amount. (2) In determining an adjudication application, the adjudicator is to consider the following matters only: (a) the provisions of this Act, (b) the provisions of the construction contract from which the application arose, (c) the payment claim to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the claimant in support of the claim, (d) the payment schedule (if any) to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the respondent in support of the schedule, (e) the results of any inspection carried out by the adjudicator of any matter to which the claim relates. [15] Under s 23(2), if the adjudicator determines that the respondent is required to pay an adjudicated amount, the respondent must pay that amount to the claimant on or before the "relevant date" as defined in s 23(1). The "relevant date" is the date occurring five business days after the adjudicator's determination is served on the respondent, unless the adjudicator determines a later date. [16] If the respondent fails to pay the whole or any part of the adjudicated amount to the claimant, the claimant may, under s 24, request the authorised nominating authority to whom the adjudication application was made to provide an adjudication certificate, and serve notice on the respondent of the claimant's intention to suspend carrying out construction work (or to suspend supplying related goods and services) under the contract. [17] Under s 25(1), the adjudication certificate may be filed as a judgment for a debt in any court of competent jurisdiction and is enforceable accordingly. However, s 25(4) also provides that, if the respondent commences proceedings to have the judgment set aside, the respondent: (a) is not, in those proceedings, entitled: (i) to bring any cross-claim against the claimant, or (ii) to raise any defence in relation to matters arising under the construction contract, or (iii) to challenge the adjudicator's determination, and (b) is required to pay into the court as security the unpaid portion of the adjudicated amount pending the final determination of those proceedings. [18] Parties may not contract out of the scheme. But the rights, duties and remedies arising under a construction contract are acknowledged and preserved by ss 3(4) and 32. In particular, s 32 clarifies that nothing in Pt 3 affects any right that a party to a construction contract may have under that contract. Moreover, nothing done under Pt 3 affects any civil proceedings arising under a construction contract except as provided in s 32(3), which provides that, in any such proceedings, a court or tribunal: (a) must allow for any amount paid to a party to the contract under or for the purposes of this Part in any order or award it makes in those proceedings, and (b) may make such orders as it considers appropriate for the restitution of any amount so paid, and such other orders as it considers appropriate, having regard to its decision in those proceedings."
Their Honours then went on to discuss the intention of Parliament in introducing the SOP Act and its interim application with respect to the rights and responsibilities of the contracting parties which fall under its purview. At [39], their Honours noted the following: "[39] As was described in Southern Han Breakfast Point Pty Ltd (In liq) v Lewence Construction Pty Ltd, the Security of Payment Act was the subject of substantial amendments in 2002. Introducing the Bill for the Building and Construction Industry Security of Payment Amendment Act 2002 (NSW), the responsible Minister stated: '[The Security of Payment Act] was designed to ensure prompt payment and, for that purpose, [the Security of Payment Act] set up a unique form of adjudication of disputes over the amount due for payment. Parliament intended that a progress payment, on account, should be made promptly and that any disputes over the amount finally due should be decided separately. The final determination could be by a court or by an agreed alternative dispute resolution procedure. But meanwhile the claimant's entitlement, if in dispute, would be decided on an interim basis by an adjudicator, and that interim entitlement would be paid.' The Security of Payment Act does not speak of "interim" entitlements and payments, but the label aptly reflects how the statutory entitlement interacts with any underlying contractual liability. In that respect, the statutory entitlement established by the Security of Payment Act stands in marked contrast to the sort of final determination provided for in the legislative scheme considered in Hockey v Yelland, the effect of which was permanent."
The fact that the SOP Act significantly changes the way in which disputes between principals and subcontractors are resolved on an interim basis and the assignment of risk between those parties has been previously noted in a number of cases. It was noted by McDougall J at [207] of Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd (2010) 78 NSWLR 393; [2010] NSWCA 190, that the SOP Act operates to alter, in a fundamental way, the incidence of the risk of insolvency during the life of a construction contract. His Honour noted: "[208] Further, the Security of Payment Act operates in a way that has been described as "rough and ready" or, less kindly, as "Draconian". It imposes a mandatory regime regardless of the parties' contract: s 34. It provides extremely abbreviated time frames for the exchange of payment claims, payment schedules, adjudication applications and adjudication responses. It provides a very limited time for adjudicators to make their decisions on what, experience shows, are often extremely complex claims involving very substantial volumes of documents (see, for example, my decision in Laing O'Rourke Australia Construction v H&M Engineering and Construction [2010] NSWSC 818 at [8]). [209] The Security of Payment Act gives very valuable, and commercially important, advantages to builders and subcontractors. At each stage of the regime for enforcement of the statutory right to progress payments, the Security of Payment Act lays down clear specifications of time and other requirements to be observed. It is not difficult to understand that the availability of those rights should depend on strict observance of the statutory requirements that are involved in their creation."

Evidence as to Bellerive's financial position

Bellerive's most recent financial statements were provided pursuant to a notice to produce and relied upon by FW. They show that Bellerive has suffered decreased revenue from 2017 to 2018, from $13,143,914 down to $11,503,278. It also suffered a decrease in more than half of its gross profit between 2017 and 2018 and was subject to diminished employee expenses by more than one third which indicated a substantial diminution in its business activities and trade. Bellerive made less than half the profits in 2018 than it did in 2017. In June 2017 Bellerive had current assets of $754,476 but these had decreased to $5,792 by 30 June 2018. Bellerive has recorded $725,954 as being loans to related parties but FW relied upon the fact that there was no evidence as to the likely recoverability of these loans, the terms of the loans and whether the borrowing companies are presently delinquent or otherwise.
Bellerive currently holds no non-current assets and the total equity attributable to the owners of the company is $218,957. There is an inconsistency between the operating income and the revenue of approximately $2 million was not explained. Bellerive currently has no property plant and equipment and has trading and other payables and liabilities of $1,407,373.
Of the 20 construction contracts produced on 18 September 2018, one was the D&C Contract subject of these proceedings. Of the remaining 19 contracts, 18 are for residential construction of the same housing project with an average contract price of $275,364 and the remaining contract is for construction management with a contract price of approximately $1.5m. With respect to the latter contract, payment claims were to be lodged each month with payment to be made the following month.
The residential construction contracts range from 12 August 2014 to 15 December 2015, although the date on five of the documents have either been blacked out or are missing. Of these contracts, one lists Arend Egbertus de Waal as nominee for Bellerive as the party, with Mr de Waal having executed the contract as director. Eleven of the contracts list the relevant contracting party as Mr de Waal as "c/o Bellerive Homes Pty Ltd", with Mr de Waal listed on the execution page as "Builder", not as director or on behalf of Bellerive. Furthermore, the date for practical completion for each of these contracts ranges from 145-165 days from the date of possession of the building site. The remaining six residential construction contracts list Mr de Waal as the relevant contracting party. Those contracts do not appear to mention Bellerive.
The most recent payment made under one of the contracts was on 6 November 2017.

The D&C Contract

As mentioned above, copies of two bank guarantees in the amount of $389,750, totalling $779,500, and the D&C Contract were tendered on the application by Bellerive in order to establish that FW has access to this amount should it be successful in its Equity Division proceedings. There was a significant dispute as between the parties as to whether this was the case. I shall consider this question below but in order to understand the dispute it is necessary to extract the relevant provisions of the D&C Contract concerning these guarantees. I propose to only extract the clauses of the D&C Contract relevant to the resolution of the dispute concerning who is entitled to the bank guarantees and in what circumstances.
A "Claim" is defined in the contract broadly as including: "any claim, demand, action, proceedings or suit relating to the Contract or as to any fact, matter or thing arising out of or in connection with the Contract or WUC, including (without limitation) any claim, demand, action, proceedings or suit seeking: (a) The payment of money; (b) An adjustment to the contract sum; (c) An EOT to the date for practical completion; or (d) any costs, expenses, loss or damages on any ground whatsoever…"
Under cl 5.1 of the D&C Contract, Bellerive was required to provide security to FW Projects. This security was provided in the form of the two bank guarantees. Under clause 5.2 of the Contract, those guarantees "shall be subject to recourse" by FW where "at least 5 days have elapsed since [FW] notified [Bellerive] of intention to have recourse to one or more of the following:" (a) "[FW] has become entitled to exercise a right under the Contract in respect of the security"; (b) FW seeks to "satisfy any debt from [Bellerive] to [FW] under the Contract"; (c) "to satisfy any bona fide claim [FW] may have against [Bellerive]"; or (d) "where [Bellerive] has committed a substantial breach of the Contract."
Clause 5.4 of the D&C Contract provides for reduction and release of the guarantees. It provides that, unless FW has a right to recourse as described above, that, relevantly, upon the issuing of a certificate of practical completion, FW's entitlement to the security shall be reduced by the amount noted in item 14(f) of the Annexure to the Contract, that being, 50%. Thus, if cl 5.4 were satisfied, FW would be obliged to release one of the NAB guarantees.
Clause 5.4 then provides that FW's entitlement to the remaining security amount shall cease 14 days after the issuance of a "final certificate". Under cl 37.4, a final certificate will be issued after the "defects liability period" expires and will evidence the final amounts payable between FW and Bellerive. Clause 35 provides that Bellerive will be liable to carry out rectification works for defects that arise during the defects liability period. The defects liability period commenced on the date of practical completion, that being, 24 April 2018, and runs for a 12-month period. The defects liability period therefore has approximately six months remaining.

Submissions on behalf of FW

Mr Corsaro submitted that the grant of a stay is discretionary and each case turns on its particular facts. He relied upon the decision of Bell JA (as her Honour then was) in J & Q Investments Pty Ltd v ZS constructions (NSW) Pty Ltd [2008] NSWCA 203. He noted her Honour's summary of the relevant principles to be applied. Those principles include that there is sound reason for making stays less readily available in cases where a judgment follows from the operation of the SOP Act and that more than a "real risk of prejudice" would be required before the discretion of the court to grant a stay would be exercised. Although her Honour was not persuaded there was sufficient prejudice to grant a stay in that matter, it was submitted that the factual findings were fundamental to her Honours decision.
Turning to whether there was a real risk of prejudice to FW if a stay was not granted, it was submitted that FW had a right of set-off as against Bellerive and that the Court would have real doubts about the solvency of Bellerive. It was noted that Bellerive had delegated its obligations under the D&C Contract to Hindmarsh and in effect Hindmarsh was a builder of the works under the D&C contract. It was further noted that Bellerive does not have an operable website, does not appear to be a trading corporation in the ordinary course of business as a builder and does not have any publicly recorded assets.
Reliance was placed on the poor financial record of Bellerive as set out above at [19]-[20]. It was submitted that the liabilities of Bellerive are greater than the amount owed under the judgment. It was submitted that, on this basis, FW has established more than a real risk of prejudice because the incapacity of Bellerive to be able to repay the judgment sum will materially prejudice FW's position should it be successful in its off-setting claim.
It was noted that the contract between Hindmarsh and Bellerive is the only current contractual obligation the company has in a construction contract other than the other contracts I have referred to above at [21]. It was thus submitted that the Court could conclude that Bellerive has no current contracts for services and should infer and assume that it will have no new or significant income in the current financial year. In this regard, it was submitted that FW could prove more than a real risk - it could prove actual prejudice.
Submissions were directed at the scope of the Equity Division proceedings and the effect of s 32 of the SOP Act. Bellerive contends that it has an entitlement under the terms of the contract to one of the guarantees on practical completion. FW disputes this, arguing that FW has a right to convert that amount so long as it has a bona fide claim for damages, which it was submitted it does. Bellerive in turn challenges the bona fides of that claim.
It was further submitted that the claims in the Equity Division proceedings go beyond remediation of defects and relate to the failure by Bellerive to perform its obligations under the contract. That is the basis upon which FW makes the claim for overpayments of the amounts previously paid under the contract; it claims that the work undertaken was overvalued. It was further contended that the defects under the contract will be substantially greater than the judgment debt.
The Equity Division proceedings brought by FW involve the litigation of the underlying contractual issues. There is a substantial overlap between the respective proceedings in the Equity Division because, in response to the assertion of an entitlement to a return of the guarantee, FW says that it has an accrued right, which requires it to demonstrate the liquidated damages, the delay damages and the defects which arise in defence of the guarantee claim.
As for the recourse to the bank guarantees, FW disputed the submissions advanced by Bellerive that FW had an entitlement under the contract to the guarantees. The two guarantees were provided under the D&C contract as a form of security for the performance of Bellerive's obligations. Bellerive contends that it had an entitlement to the release of the first of them on practical completion, whereas FW submits that it has an accrued right to convert the guarantee under the contract so long as it has a bona fide claim for damages. Thus, it was submitted, it was wrong to suggest that FW had the benefit of these bank guarantees because Bellerive denies any defects and seeks the return of the first bank guarantee in the Equity Division Proceedings commenced by it. As for the second bank guarantee, the time for delivery of it will not arise until 12 months after practical completion which is about 24 April 2019.
It was further noted that the bank guarantees provided by Bellerive to fund its security obligations under the contract had been funded by Hindmarsh and not from its own resources.
It was submitted that seeking this stay does not involve a circumvention of the requirements of s 25(4)(b) of SOP Act because s 32(1) of that Act provides that FW's rights under the D&C contract are not affected by the determination issued under Part 3. Section 32 militates substantially in favour of the Court granting a stay because principles of fairness dictate that, in circumstances where there is evidence to establish that a contract will not be able to meet an off-setting claim in other civil proceedings, a stay should be granted.
Finally, it was noted that FW is prepared to set aside from the sale of the development the amount of the judgment debt which would have the effect of a freezing order. It was submitted that this was an additional discretionary factor in support of the stay being granted.

Submissions on behalf of Bellerive

It was submitted on behalf of Bellerive that the overarching policy of SOP Act impacts significantly on any application for a stay of judgment. Reliance was placed on the terms of s 25(4)(b) of the SOP Act and it was noted that no application has been made by FW to have the judgment set aside. To do so would have required FW to pay the judgment sum into Court. It was submitted that the pursuit of an alleged offsetting claim coupled with the application to stay the judgement is an attempt to circumvent s 25(4)(b) of the SOP Act.
As for the relevant authorities, reliance was placed on the decision of Bitannia Pty Ltd v Parkline Constructions Pty Ltd (2006) 67 NSWLR 9; [2006] NSWCA 238 ("Bitannia") at [5] per Hodgson JA and at [82] per Basten JA as well as other decisions to which I will refer in more detail below. Reliance was also placed on the decision of Probuild Constructions. It was submitted that the test is a fairly strict one for somebody seeking a stay because a stay is the very thing that the Act was designed to prevent: the owner standing in the way of payment to the contractor.
It was submitted that FW needs to establish, in broad terms, why it says it has a strong prima facie case and that the Court was not in a position to conclude that the alleged offsetting claim had any particular strength, that it was better than arguable or even whether it was arguable at all. The observations of Keane JA (as his Honour then was) in R J Neller Building Pty Ltd v Ainsworth (2009) 1 Qd R 390; [2008] QCA 397 ("R J Neller Building") at [42] were relied upon in this regard. Although the onus was not on Bellerive to persuade the court that there was no such strong prima facie case, it was noted that the adjudicator found that Bellerive was entitled to significant extensions of time and corresponding damages for delay in circumstances were FW claims damages for "each and every day of delay after 29 September 2017."
It was further submitted that FW's claim for defect damages overlooks the fact that cl 35 of the D&C contract provides for a period within which Bellerive is obliged to rectify defects and is doing so on an ongoing basis in a timely fashion.
As for the risk of any further prejudice, it was submitted that FW has the ongoing benefit of at least one of the bank guarantees if it resists the proceedings in the Equity Division. It was submitted that the existence of that protection is relevant to the exercise of discretion in relation to the application for a stay of the judgment.
As to the risk of Bellerive's insolvency, it was submitted that on the basis of the evidence produced by FW there is no reason for the court to conclude that there is any risk of Bellerive's insolvency let alone the greater than usual risk of which the authorities emphasise is necessary in order to obtain a stay of judgment based on adjudication under the SOP Act. Nor, it was submitted, were there any unusual features of the case. In any event, the onus is not on Bellerive to prove it is not at risk of insolvency. On that issue, the judgment sum is an asset and if it were paid to Bellerive the financial position of Bellerive would not rise above the ordinary case where it might at some stage fail. But that is a risk which is statutorily transferred to FW as owner under the SOP Act.
The Court was directed to the balance sheet and statement of financial position which shows an excess of current assets (which includes the judgment amount) over current liabilities. If the judgment sum was paid towards it there would be positive working capital. The reports show that the activities of Bellerive have been cut back to some extent over the last financial year and the inference was available that the revenue over the next year might not be the same as 2017. But if that occurs, then nor would any obligation to pay trade contractors arise. The risk that Bellerive might not be able to repay the money if paid to it is the risk that, under the policy of the SOP Act, FW is expected to bear.
It was noted that FW has not sought to expedite the Equity Proceedings in any way and in fact they are not being conducted expeditiously at all. Nor was the stay brought promptly. In this respect, the cross-examination of FW's solicitor, Mr Ward, was relied upon. Finally, reliance was placed on the undertaking by Bellerive to the Court.

Consideration

This Court's inherent power to grant a stay of the judgment of 18 May 2018 in this matter must be exercised consistently with the principles derived from the relevant decisions concerning the granting of stays of judgments under Part 3 of the SOP Act. These authorities all confirm that the circumstances justifying a stay of a judgment in such matters are more limited than those that arise when the Court is exercising its inherent discretionary power to grant a stay generally.
I have had regard to the following decisions which have considered the circumstances in which a stay might be granted in relation to a judgment entered under Part 3 of the SOP Act.
In Grosvenor Constructions NSW Pty Ltd v Musico (2005) 21 BCL 266; [2004] NSWSC 344 ("Grosvenor Constructions"), Einstein J granted a stay of a judgment debt in the amount of $486,324.77 because there was evidence that the sub-contractor had been placed under external administration and had an overall financial deficit of $4,263,210. His Honour said at [4]: "It is quite plain unless the stay of proceedings now sought is granted the defendants, if successful in final proceedings, would suffer irreparable prejudice as payment pursuant to the judgment debt presently on foot could never be recouped. In effect a failure to order the stay would in practice, convert an amount which ought to be an interim payment into a final payment".
His Honour went on to consider the relevant principles for granting a stay pending an appeal and then observed: "[31] Similarly, there is no reason why, in appropriate cases, a stay cannot be ordered in circumstances such as the present. Clearly the analogy with appeals is not a perfect one. Whilst payments under the Act are interim, it nonetheless is the policy of the Act that successful claimants be paid. For that reason, there is a sound reason for making stays less readily available in relation to debts arising under the Act, in contrast to the position in relation to appeals arising from curial proceedings. For example, in cases such as the present, the Court might require more than a "real risk that [the respondent] will suffer prejudice or damage, if a stay is not granted" (Kalifair Pty Ltd v Digi-Tech (Australia) Ltd (2002) 55 NSWLR 737, at 741-742 [18] (emphasis added)). [32] However I accept that in a case such as the present, where there is a certainty that the defendants' rights will be otherwise rendered nugatory, and that it will suffer irreparable prejudice, the proper and principled exercise of the Courts discretion is to grant a stay."
In Veolia Water Solutions & Technologies (Australia) Pty Ltd v Kruger Engineering Australia Pty Ltd (No 3) [2007] NSWSC 459, McDougall J adopted the principles expounded by Einstein J in Grosvenor Constructions when considering a stay application concerning a judgment arising from the SOP Act. In doing so his Honour stated the following: "[39] I adopt his Honour's statement of the principles as being those that, in general, should be considered when deciding an application such as that before his Honour, or that before me. However, in any particular case, the application of those principles, and the balancing of the various considerations, will require careful attention. For example, each case will require close analysis of the extent or certainty of the risk of prejudice or damage, if a stay is not granted."
His Honour went on to observe: "[72] The exercise of the discretion to grant a stay requires a balancing of the relevant factors. Two factors of particular significance in this case are: (1) On the one hand, the policy of the Security of Payment Act, that successful applicants be paid promptly (recognised by Einstein J in Grosvenor at para [31]); and (2) On the other, the likelihood of irreparable prejudice, where that prejudice would flow from the refusal of the stay because cross-claims would be rendered worthless (recognised by Einstein J in Grosvenor at para [32]). [74] As a general rule, I think, the balancing of the two significant factors to which I referred in para [72] above requires the Court to look closely at the strength of the cross-claim asserted by the applicant for a stay. There are at least two reasons why this is so. The first is that there has been an examination, admittedly of an abbreviated and sometimes rough and ready way, of the competing claims. I accept that adjudicators are as prone to error as other human beings; and I accept also that the stresses placed upon them by the extremely tight timetable for which ss 19 to 21 of the Security of Payment Act provide may magnify the possibility of error. Nonetheless, the legislature has said that disputes as to progress payments are to be determined in the first instance through the mechanism provided in the Security of Payment Act. That mechanism allows an examination not only of the payment claim but also of the payment schedule, in which (one might expect) the respondent ordinarily would set out all reasons why, it says, the claimant is not entitled to be paid. [75] The second reason flows from the plain legislative intention that progress claims should be dealt with, and paid, promptly. In my view, any court faced with, and required to give effect to, that clear legislative policy should be careful before exercising a discretion in a way that would intercept the effectuation of that policy in a particular case. Thus, I agree with Einstein J that the Court would ordinarily do so (in cases such as the present) only where the failure to do so would have the practical effect of making permanent that which, clearly enough, the legislature intended to be only interim."
In Bitannia, Hodgson JA discussed the remedy of a stay in circumstances where an exaggerated claim is made and the respondent has not served the relevant payment schedule within the time required by the SOP Act. His Honour said as follows: "[5] Subject to what I say below about misleading conduct, it may be that in those circumstances the only remedy available is a remedy by way of stay or injunction, if the respondent can show a strong prima facie case to the effect that the result produced by the Act is unjust, that there is a substantial risk that money paid over would be irrecoverable, and that proceedings for a final resolution of the issues are being expeditiously pursued: see Brodyn Pty. Limited v. Davenport [2004] NSWCA 394, 61 NSWLR 421, at [84]-[88]."
Justice Einstein again considered the relevant principles in Taylor Projects Group Pty Ltd v Brick Department Pty Ltd [2005] NSWSC 571. At [59] his Honour said: "The principle in Grosvenor is only applicable where the claimant is either actually, or very close to, insolvent. Were it otherwise then the stay itself may drive the claimant into the very insolvency which the interim payment regime of the Act is designed to prevent. Such a result would be unjust in circumstances where: · prima facie there is a debt due from the respondent to the claimant; · the final amounts due between the parties may not be ascertained for weeks, months or years; · the Court is in no position to assess the relative merits of the parties on the final claims; · the financial situation of the respondent may itself deteriorate so that the claimant loses for all time the benefit of the right which is now prima facie enforceable; · there is nothing in the Act which suggests a claimant's entitlement to receive the interim payments depends upon it establishing a capacity to repay those sums if there is a final determination unfavourable to it; · the claimant is deprived of the very funds the Act contemplated would be made available to it to pay its own employees and suppliers."
In J & Q Investments Pty Ltd v ZS Constructions (NSW) Pty Ltd [2008] NSWCA 203, the principal under the contract lodged an appeal against a decision of McDougall J with the Court of Appeal and sought a stay of the orders made until the appeal was determined. Bell JA (as her Honour then was) described the grounds for the application as follows: "The application was advanced on the basis that the grounds of appeal are "strongly arguable" and that there is a strong risk that if the monies are paid out to the respondent it is likely that they will not be recovered in the event the appeal is successful."
In determining the matter, Bell JA considered the risk of prejudice to the principal. There was evidence that the defendant had outstanding amounts due to other sub-contractors and suppliers in the realm of $500,000 with respect to which the defendant intended to satisfy by applying the monies received from the plaintiff. However, there was also evidence that the defendant was an active construction company engaged in a number of current projects and three holdings of residential land. In considering the application, consideration was given by his Honour to the following: "[23] In Brodyn Hodgson JA (at 449 [85]) albeit, in a somewhat different context, commented on the policy of the Act, which he had earlier identified as that progress payments be made, as a discretionary factor weighing against the grant of a stay. In Herscho v Expile Pty Ltd [2004] NSWCA 468 his Honour commented with approval on the remarks of Einstein J in Grosvenor Constructions NSW Pty Limited v Musico [2004] NSWSC 344 at [31]-[32] that, having regard to the policy of the Act, there is sound reason for making stays less readily available in these cases [as opposed to stay applications pending the determination of an appeal] and looking for more than "a real risk of prejudice" if a stay is not granted (at [3])."
Justice Bell dismissed the application saying that, "[w]hile it cannot be said there is no risk of prejudice to the appellant, having regard to the principles to which I have referred, I am not persuaded this is a sufficient basis for the grant of a stay in the context of these proceedings."
Justice Keane, when his Honour was sitting on the Queenlsand Court of Appeal, discussed the principles relating to a stay under the equivalent Queensland legislation (the Building and Construction Industry Payments Act 2004 (Qld)) in the case of R J Neller Building. His Honour relevantly said: "[40] …the BCIP Act seeks to preserve the cash flow to a builder notwithstanding the risk that the builder might ultimately be required to refund the cash in circumstances where the builder's financial failure, and inability to repay, could be expected to eventuate. Accordingly, the risk that a builder might not be able to refund moneys ultimately found to be due to a non-residential owner after a successful action by the owner must, I think, be regarded as a risk which, as a matter of policy in the commercial context in which the BCIP Act applies, the legislature has, prima facie at least, assigned to the owner. [41] The mere existence of the very kind of risk on which the provisions of the BCIP Act in favour of the builder are predicated would not ordinarily be sufficient of itself to justify a stay of an execution warrant based on the registration of a certificate of adjudication. There may, of course, be other circumstances, which, together with this risk, justify the staying of a warrant of execution based on the registration of an adjudication certificate. For example, the builder may have engaged in tactics calculated to delay the ultimate determination of the rights and liabilities of the parties so as unfairly to increase the owner's exposure to the risk of the builder's insolvency. Or the builder may have restructured its financial affairs after the making of the building contract so as to increase the risk to the owner of the possible inability of the builder to meet its liabilities to the owner when they are ultimately declared by the courts. In this case there are no such circumstances."
More recently, in Goodwin Street developments Pty Ltd v DSD Builders Pty Ltd [2018] NSWSC 1229 at [44], McDougal J referred to the observations by Keane J in R J Neller Building at [39]-[41] and then noted that a risk that goes no further than the risk inherent in the statutory transfer of risk pending final determination is not sufficient to justify a stay "without something more".
To summarise the above principles, a stay will generally be less readily available in relation to judgments entered following an adjudication under the SOP Act than in relation to appeals arising from curial proceedings. The question involves a balancing exercise between the policy of the SOP Act (that successful applicants be paid promptly) and the likelihood of irreparable prejudice which would flow from the refusal of the stay if success in the related proceedings would be rendered worthless. The risk needs to be more than "a real risk of prejudice" if a stay is not granted.
Although the decision as to whether to grant a stay is a discretionary one to be considered on the facts of each case, some examples provided by the authorities as to when a stay might be granted are where: 1. A failure to order the stay would in practice, "convert an amount which ought to be an interim payment into a final payment". That is, where there is a certainty that FW's' rights will be otherwise rendered nugatory, and that it will suffer irreparable prejudice: Grosvenor Constructions per Einstein J. 2. A respondent can show a strong prima facie case to the effect that the result produced by the Act is unjust and that there is a substantial risk that money paid over would be irrecoverable and that proceedings for a final resolution of the issues are being expeditiously pursued: Bittania per Hodgson JA at [5]. 3. The builder may have engaged in tactics calculated to delay the ultimate determination of the rights and liabilities of the parties so as to unfairly increase the owner's exposure to the risk of the builder's insolvency: R J Neller Building per Keane JA at [41]. 4. The builder may have restructured its financial affairs after the making of the building contract so as to increase the risk to the owner of the possible inability of the builder to meet its liabilities to the owner when they are ultimately declared by the courts: R J Neller Building per Keane JA at [41].
By reference to these examples, it was not contended by FW that Bellerive had restructured its financial affairs to increase the relevant risk nor that it had engaged in tactics to delay the ultimate determination of the rights and liabilities of the parties. Rather, this application turns on the financial status of Bellerive in circumstances where FW asserts a right of set-off in the Equity Division proceedings.
Turning first to the financial circumstances of Bellerive, I have summarised the state of them at [19]-[20] above. I am also satisfied that the contracts entered into by Bellerive in the period leading up to the present contract (and related contract with Hindmarsh) appear to be the only work pending for Bellerive. There was no evidence before the Court that Bellerive is owed further money from the contracts produced under the notice to produce. Indeed, given the dates of the contracts, it appears unlikely that any further money would be forthcoming. I have also had regard to the fact that the onus is on FW to prove that there is more than a real risk of insolvency on the part of Bellerive. It is not for Bellerive to establish that there is no greater than the usual risk of insolvency.
It appears that Mr de Waal (Bellerive's sole director) was the contracting party in all but one of the 18 residential construction contracts, rather than Bellerive. In 12 of the contracts, Mr de Wall is described as an individual builder but Bellerive is referenced immediately thereafter. However, in those contracts, Mr de Waal appears is listed on the execution page as "builder" and not as a director. Five of the contracts appear to make no mention of Bellerive whatsoever. In any event, whether or not the revenue from those contracts came to Bellerive or Mr de Waal personally (there was no evidence on this point before me), the fact remains that Bellerive appears to have reduced its business over the last financial year. This means not only that there may not be any revenue coming into the company in the near future, it also means that there will be no additional expenses in the form of outgoings to trade creditors.
I accept that, even if the amount of the judgment was paid to Bellerive, it would still "be in the red" but, by way of analogy, the risk of insolvency on the part of Bellerive falls far short of what was the situation in Grosvenor Constructions. In that matter, the Court was in a position to be satisfied with certainty that the final amount would not be repaid. Although I accept that there is no authority for the proposition that a principal will need to establish that a contractor must be insolvent before a stay of this nature would be granted, the comparison with the facts in Grosvenor Constructions is a relevant one.
A further matter relevant to the issue of prejudice to FW is whether it does in fact have recourse to the bank guarantees. If it does, then the risk of any prejudice is reduced. I am satisfied that, under cl 5.2 of the D&C Contract, FW is to have recourse to the bank guarantees if it has a "bona fide" claim against Bellerive. By reference to the definition of "claim" in the D&C Contract I am satisfied that the proceedings in the Equity Division are such a claim, being a claim that Bellerive has breached the contract in a number of respects. Thus, if FW is successful in its claim, it gets to keep the security. If it does not have a "bona fide" claim, then the bank guarantees should be returned to Bellerive. Clearly, the issues in the respective proceedings are closely connected.
The basis upon which FW disputed that it had the security of those bank guarantees for funding focussed on the nature and scope of the proceedings in the Equity Division. FW relied upon the fact that there are two aspects of its claim. The first claim turns on whether Bellerive carried out the work that it made claims for. FW contends that, even if its damages claim is unsuccessful, Bellerive will still have to pay back the amount of the judgment debt and, if Bellerive pays that amount back, FW will no longer have any security for any defects outstanding in the future. Thus, it was contended, FW would be prejudiced because it would lose its right to have those bank guarantees as security as against outstanding defects.
I have considered FW's submission on this issue. It assumes that FW will be successful in all aspects of the proceedings it has brought against Bellerive under the contract in circumstances where I am not in a position to test that assumption. There is no evidence before the Court as to whether FW has an arguable case in that regard. It is to be accepted that the issues remain to be resolved in those proceedings and it would not have been possible in the time available to hear this application in the Duty List to consider those arguments in any detail. Despite this, the question of whether FW had an arguable case is relevant to the application in at least two regards. First, it is related to the question of whether FW has recourse to the bank guarantees. Second, the authorities have suggested that the existence of a strong prima facie case, in conjunction with other factors, may be a relevant factor in determining an application for a stay in circumstances such as these.
It was also accepted on behalf of FW that there is no evidence before the court that its Equity Division proceedings are in fact worth $1.5m, although that is the opinion of the relevant Director at FW. I was provided with the decision of the adjudicator to confirm the corrected amount of the adjudication but it was not suggested that I should read those reasons and seek to determine the merits of FW's claim.
A further matter going to the prejudice to be incurred by FW is the fact that Court was provided with a signed undertaking by Mr de Waal, as director of Bellerive on its behalf, that it would not diminish the value of its assets or use the judgment payment to repay its trade creditors (as described in the financial records). This was an undertaking to the Court, the breach of which could amount to an act of contempt. This is a further relevant factor.
Turning then to the three matters referred to by Hodgson JA in Bittania at [5], there is insufficient evidence for me to be satisfied that FW has a strong prima facie case in the Equity Division proceedings; although there is a risk that money paid over would be irrecoverable the existence of the undertaking and the bank cheques ameliorates this to an extent. As for the third factor, there is no evidence that the final resolution of the issues is being "expeditiously pursued", although I note the evidence of Mr Ward that FW has not breached any timetable for directions in the Equity Division proceedings.
Although the undertaking provided by FW is a relevant factor on the question of the stay, FW was not willing to pay the amount of the judgment debt into Court. When I inquired of FW's counsel as to why this was so, I was informed that FW is an asset rich company which is currently selling off-the-plan with a mortgage. As soon as the mortgage has been satisfied, it will set aside the funds. I have regard to this matter as well as the signed undertaking from Bellerive in the terms extracted in the annexure to this judgment.
Overall, having regard to all of the above considerations, although I am satisfied that Bellerive's financial records raise some concern as to whether it has any future income stream, I am not satisfied that FW has established that a stay of the judgment of 18 May 2018 would be consistent with the underlying policy of the SOP Act and I do not propose to grant it.
I turn then to the question of costs. The Court has a broad discretion to award costs: s 98 of the Civil Procedure Act, although that discretion is fettered to some extent by the Uniform Civil Procedure Rules 2005 (NSW) r 42.1 which relevantly provides that the Court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs.
When it became clear at the end of the first day of the hearing that Bellerive was to provide FW with further contracts in response to the notice to produce, Mr Corsaro submitted that he had prepared his client's application on the basis that there were no contracts. An adjournment was required to cure the prejudice caused by the late provision of those contracts, although FW ultimately relied upon them in further support of its position. I have had regard to the contracts but their existence did not persuade me that Bellerive's final circumstances were any better or worse than had they not been in existence. That is, they were not determinative of the result I have arrived at.
Although it seems to me that the appropriate costs order is that FW pay Bellerive's costs of the motion, the issue of the appropriate costs order was not addressed at the hearing of the motion. In those circumstances, I propose to afford an opportunity to the parties to make any further submission as to the appropriate costs order within seven days.

ORDERS

Accordingly, I make the following orders: 1. The notion of motion filed 3 August 2018 seeking a stay of the judgment of this Court on 18 May 2018 is dismissed. 2. Unless an application for a different order is made in writing to my Associate within seven days, FW is to pay Bellerive's reasonable costs of the motion.

notes

I note the undertaking to the Court by Bellerive in the terms of Annexure A to this judgment. Annexure A "Bellerive Homes Pty Limited (Bellerive) undertakes to the Court that: 1. in the circumstance that FW Projects Pty Limited as trustee for the Freshwater Development Trust (FW Projects) pays it AUD$1,166,550.71 (Judgment Payment) in satisfaction of the judgment gave and entered in proceeding no 2018/00156528 on 18 May 2018; and 2. FW Projects continues to press its claim in proceeding no. 2018/00185756 (Damages Proceedings), then Bellerive will not dispose of, deal with or diminish the value of any of its assets up to the unencumbered value of AUD$1,166,550.71 or use the Judgment Payment to repay its $1,407,373 of trade and other creditors (referred to at page 7 of Bellerive's Financial Report for the financial year ended 30 June 2018), until after the Damages Proceedings have concluded (including any appeal). The Court notes that this undertaking is given without concession or admission by either Bellerive and is without prejudice to any set off or other claims or rights Bellerive may have in proceedings commenced to the date of the undertaking or at all."

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 October 2018

Building and Construction Industry Payments Act 2004(Qld)

Building and Construction Industry Security of Payment Amendment Act 2002(NSW)

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