[2019] NSWCA 60
In the matter of Douglas Aerospace Pty Ltd (2015) 294 FLR 186
Source
Original judgment source is linked above.
Catchwords
[1954] ALR 92928 ALJ 319(2019) 136 ACSR 563[2019] NSWCA 60
In the matter of Douglas Aerospace Pty Ltd (2015) 294 FLR 186(2015) 33 ACLC 15-012[2015] NSWSC 167
Infigo II Pty Ltd v Linmas Holdings Pty Ltd [2023] NSWSC 755
Radford v De Froberville [1978] 1 All ER 33[1977] 1 WLR 12627 BLR 35
Rialto Sports Pty Ltd v Cancer Care Associates Pty Ltd [2022] NSWCA 146
Sceam Construction Pty Ltd v Clyne (2021) 64 VR 404(2021) 365 FLR 326[2021] VSCA 270
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272(2009) 83 ALJR 390(2009) 253 ALR 1[2009] NSW ConvR 56-232
[2009] V ConvR 54-757
[2009] Q ConvR 54-711
(2009) 25 BCL 256
Judgment (8 paragraphs)
[1]
Introduction
These reasons for judgment concern an application by the plaintiff, Linmas Holdings Pty Ltd (Linmas), to set aside a statutory demand issued by the defendant, Infigo II Pty Ltd (Infigo), on the basis of an alleged offsetting claim.
[2]
Salient facts
The following matters are not in dispute, except where the contrary is indicated.
Linmas conducts residential and hospitality building projects.
Infigo is a builder specialising in the construction and redevelopment of hospitality and hotel sites.
On 4 July 2022, Linmas entered into a contract with Infigo for certain renovation work to a building containing 38 studio apartments at 1 Caroline Street, Balmain (the Property).
On 9 December 2022, Infigo served on Linmas a payment claim under s 13 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SOP Act) for works undertaken at the Property. Infigo claimed payment in respect of 17 categories of work. Those works had a total contract value of $2,185,204, [1] of which Linmas had paid $1,909,978 prior to this payment claim. Subject to one exception, Infigo claimed that the works were now complete, and sought payment of the balance of the contract value. The exception concerns tiling works, which were said to be 98 per cent complete, and in respect of which Infigo claimed payment of a further sum that would take Linmas' total payments up to 98 per cent of the contract value for tiling works. The total payment claimed by Infigo for the 17 work categories was $270,756, which (if paid) would take the total amount paid by Linmas for contract works to $2,180,734. In addition, Infigo claimed a total sum of $408,856 in respect of what it described as approved variations to the contract works.
On 23 December 2022, Linmas served a payment schedule on Infigo pursuant to s 14 of the SOP Act. Linmas contended that Infigo's work in each of the 17 categories was defective and/or incomplete. Linmas therefore scheduled an amount for payment in respect of each category that was, in many instances, less than the amount paid in respect of that category to date. Overall, Linmas scheduled a total amount of $1,810,993 for contract works, being $98,985 less than the amount of $1,909,978 paid to date, and $369,741 less than the total of the amount paid to date plus the further $270,756 claimed by Infigo in this payment claim. Linmas' payment schedule disallowed most of the variations claimed by Infigo. Linmas also made a claim for liquidated damages in the sum of $33,000.
On 20 January 2023, Infigo filed an adjudication application under s 17 of the SOP Act.
Linmas filed its adjudication response on 30 January 2023, accompanied by a report of Linmas' building consultant, Mr Ken Winton. The adjudication response reflected the position taken by Linmas in its payment schedule concerning contract works, Infigo's variation claims, and liquidated damages.
The adjudication response and Mr Winton's report provided greater detail about Linmas' allegations that aspects of the work were defective and/or incomplete. Those allegations do not appear to concern structural matters. They include, for example, allegations that Infigo failed to install some power points and lights, that some floor boards had not been laid under the skirting and that some skirting repairs were outstanding, that 16 bathrooms required re-tiling and waterproofing to repair a sink waste point, that certain repairs were required to some bathroom fittings and fixtures, that further coats of paint were required externally and to the ceiling and walls of the common areas, and that Infigo failed to complete the cleaning of the building and to remove certain builders' waste.
The adjudication response and Mr Winton's report also provided greater detail about Linmas' reasons for rejecting most of the variation claims. Linmas contended that most of the works for which Infigo had claimed variations were within the scope of the work specified in the contract, and so were not variations.
On 20 February 2023, the adjudicator determined that the total amount payable for contract works was $2,129,164. This flowed from a determination that Infigo was entitled to further payments totalling $219,186 in respect of contract works, being $51,570 less than the claimed amount of $270,756. In addition, the adjudicator also determined that Infigo was entitled under the SOP Act to $188,520 in respect of variations. The adjudicator disallowed Linmas' claim for liquidated damages. The overall result of the adjudication, taking into account these determinations and certain delay costs that the adjudicator allowed to Infigo, was that Infigo was entitled under the SOP Act to payment of $406,990 (the adjudicated amount).
On 3 March 2023, judgment was entered in the District Court of New South Wales in favour of Infigo against Linmas in the amount of $453,934 pursuant to s 25(1) of the SOP Act. Linmas does not dispute that the amount for which judgment was entered reflects the adjudicator's determination.
On 10 March 2023, Infigo issued a statutory demand to Linmas in respect of a debt of $453,605, being the amount of that judgment debt less an immaterial amount paid to Infigo by Westpac Banking Corporation pursuant to a garnishee order made in on 6 March 2023 in the same District Court proceeding in which the judgment was entered.
The statutory demand was served on Linmas on 13 March 2023. Linmas commenced these proceedings by originating process filed on 3 April 2023 claiming an order setting aside the statutory demand. An affidavit of Linmas' solicitor, Mr Benjamin Chedid, was filed and served together with the originating process. Linmas read that affidavit, together with a further affidavit of Mr Chedid sworn on 31 May 2023, at the hearing of these proceedings on 30 June 2023.
Mr Chedid's first affidavit sworn on 3 April 2023 referred to the events that I have described at [5]-[15] above, and exhibited copies of the building works contract, Infigo's payment claim, Linmas' payment schedule, part of Infigo's adjudication application, part of the Linmas' adjudication response (including Mr Winton's report), and the adjudicator's determination.
Mr Chedid then deposed:
"Offsetting claim
13. Identified in Linmas's Payment Schedule and Adjudication Response are incomplete works Infigo was required to perform under the Contract. Linmas has incurred and is set to incur costs to complete and rectify defective work.
14. To date, Linmas has paid the amount of $1,994,023.17 to Infigo under the Contract. Works completed to date are valued in Linmas' Adjudication Response as $1,817,660.00.
15. Clause 34.7 of the Contract contains express provision for liquidated damages against Infigo, should Practical Completion not be reached by the Completion Date. Under the Contract, practical completion was to be achieved by 27 September 2022. The date for practical completion was adjusted to 10 October 2022. The Superintendent granted practical completion on 12 November 2022, 33 days later.
16. Mr Hilmer has instructed me to draft and file a Statement of Claim, naming Infigo as the defendant, for breach of contract and negligence, seeking damages exceeding the amount of the Judgment.
17. I anticipate filing those proceedings in the next 14 days."
Mr Chedid's first affidavit was the only supporting affidavit filed and served by Linmas within the 21-day statutory period.
Mr Hilmer, who is referred to in paragraph 16 of Mr Chedid's affidavit (excerpted above at [17]), is a director of Linmas.
The basis of Mr Chedid's evidence in paragraph 13 of his affidavit that Linmas "has incurred and is set to incur costs to complete and rectify defective work" is not apparent from the affidavit. Mr Chedid does not claim to have any personal knowledge of those matters. Nor does he state that this aspect of his evidence is given on information and belief, or that it is a summary of his instructions. Infigo disputes that Linmas has incurred any such costs to date, as the statement of claim filed by Linmas in the District Court proceedings referred to at [21]-[22] below describes all of that work as prospective and there is no evidence in these proceedings that Linmas has already carried out any such work. Infigo also disputes that Linmas will incur any such costs in the future because it no longer owns the Property, as referred to at [27] below.
In his second affidavit sworn on 31 May 2023, Mr Chedid gave evidence of a statement of claim that he had prepared and filed in the District Court on behalf of Linmas against Infigo on 30 May 2023. A copy of the statement of claim, which was verified by Mr Hilmer, was annexed to the affidavit.
The statement of claim pleads that Linmas "is and was at all material times" the owner of the Property. It pleads the contract entered into on 4 July 2022, and certain terms of that contract. The statement of claim then pleads that Infigo breached the contract by leaving certain works incomplete and by carrying out other works in a defective manner. The details of the allegedly incomplete and defective works are set out in Annexure A to the statement of claim. It is then pleaded that:
"9 The plaintiff has suffered loss and damage, being:
a. the cost of rectifying the work in the amount of $364,178.80;
b. loss of rent during the rectification work, including to existing tenants, carry out the rectification work, and find replacement tenants; and
c. the cost of a project manager to oversee the works."
The statement of claim then pleads a further breach of contract by Infigo in failing to achieve practical completion by 27 September 2022. Linmas claims $59,000 in liquidated damages in the statement of claim in respect of that alleged breach.
In his second affidavit, Mr Chedid deposed that he was still waiting to receive a quotation for the project management services included in the alleged loss pleaded in paragraph 9 of the statement of claim excerpted above.
In relation to the loss of rent aspect of the damages claim as pleaded in the statement of claim, Mr Chedid deposed in his second affidavit that he was "aware through my dealings with the Plaintiff and my instructions that the building is managed by an entity known as UKO". Mr Chedid referred to a copy of the tenancy schedule for the Property that he had obtained from UKO on 30 May 2023. Mr Chedid continued:
"The rectification works will require tenants to vacate their units so the works can be carried out and a reasonable time to find a suitable tenant. In my experience as a property and construction lawyer, including my dealings with developers and owners of properties for lease, I estimate that it will reasonably take:
a. a few days to a week for rooms to be vacated and works to commence;
b. two weeks for works to be carried out; and
c. one to two weeks to find another suitable tenant."
At the hearing on 30 June 2023, Infigo tendered an affidavit sworn by Mr Chedid on 22 June 2023. Linmas had served that affidavit on Infigo in separate proceedings in this Court in which Infigo seeks orders under s 37A of the Conveyancing Act 1919 (NSW) setting aside a transfer of the Property from Linmas to 2041House Pty Ltd (2041House). The affidavit had been read at a hearing of Infigo's application for freezing orders in those proceedings. [2]
The salient aspects of the contents of Mr Chedid's 22 June 2023 affidavit, and the documents exhibited thereto, may be summarised as follows:
1. Mr Chedid is the principal of the firm of solicitors acting for all three defendants in those proceedings;
2. Linmas purchased the Property on or about 25 October 2021 in its capacity as trustee of the Linmas Trust;
3. Linmas entered into the building contract with Infigo in its own capacity on 4 July 2022, and immediately entered into "a back-to-back construction contract" with itself in its capacity as trustee for a contract sum that was $100,000 greater than the contract sum payable by Linmas to Infigo under the first-mentioned contract; [3]
4. Mr Hilmer instructed Mr Chedid in early February 2023 that, in circumstances where Linmas was in dispute with Infigo about the building work, Mr Hilmer wished to appoint a new trustee to the Linmas Trust;
5. Linmas was removed, and 2041House was appointed, as trustee of the Linmas Trust on 23 February 2023;
6. pursuant to clause 2 of the Deed of Removal and Appointment of Trustee - between Mr Hilmer (as Appointor), Linmas (as Outgoing Trustee), and 2041House (as New Trustee) - dated 23 February 2023, Linmas agreed to cause the trust fund of the Linmas Trust, "and all rights, benefits and provisions thereof" to be vested in 2041House upon the trusts and subject to the powers and provisions contained in the trust deed, upon receiving a request from 2041House to do so;
7. on 13 March 2023, Mr Chedid wrote to Revenue NSW enclosing an executed transfer of the Property from Linmas to 2041House and applying for a complex assessment for transfer duty under s 54(3) of the Duties Act 1997 (NSW);
8. Revenue NSW wrote to Mr Chedid on 18 April 2023 enclosing an assessment of the duty payable by 2041House on the transfer of the Property in the amount of $50 in accordance with s 54 of the Duties Act;
9. Mr Chedid took steps to arrange the transfer of the Property from Linmas to 2041House from 18 April 2023, and 2041House became the registered proprietor of the Property on 9 June 2023 after some delay occasioned by requirements of the registered mortgagee;
10. in the meantime, 2041House exchanged contracts on 15 May 2023 for the sale of the Property to Co-Living HeadCo Pty Ltd as trustee of the Caroline Balmain Trust (Co-Living) for $15,100,000;
11. the sale of the Property to Co-Living was subject to conditions that Mr Chedid was informed on 16 June 2023 had been satisfied.
[3]
Issues
Linmas does not dispute the judgment debt in respect of which Infigo issued the statutory demand. Linmas contends that the statutory demand should be set aside because it has an offsetting claim against Infigo for an amount greater than the amount of that judgment debt.
The brief written opening submissions served by Linmas prior to the hearing alluded in vague terms to the following five elements of the offsetting claim:
1. a claim for the cost of completing and rectifying allegedly incomplete and defective building work;
2. a claim for "any consequential losses", which was presumably intended to refer to the loss of rent and the cost of project management services claimed in paragraph 9 of the statement of claim that Linmas had filed in the District Court on 30 May 2023 and referred to in Mr Chedid's second affidavit;
3. a claim for liquidated damages in the sum of $33,000;
4. a contention that there was "a differential … of about $215,000" between variations quantified by in Mr Winton's report and the variations that had been claimed by Infigo and allowed by the adjudicator; and
5. a claim to recover an amount of $176,363, which was described as being the amount by which Linmas contends that the total sums it has paid to Infigo to date exceed the value of the building work completed by Infigo. [4]
At the hearing on 30 June 2023, Linmas limited the offsetting claim on which it relies, or purports to rely, in these proceedings to:
1. the "differential" in relation to variations referred to above, which Linmas submitted was a claim for approximately $185,915 (the variations differential); [5] and
2. a claim for the cost of completing and rectifying the allegedly incomplete and defective building work identified in its payment schedule and adjudication response, which Linmas quantified in the amount of approximately $329,690.
Infigo submitted that Mr Chedid's first affidavit did not support an application to set aside the statutory demand on the basis of the variations differential or on the basis of the rectification claim, and that the Court therefore lacks jurisdiction to set aside the statutory demand on the basis of those claims.
Infigo further submitted that the variations differential was not an offsetting claim within the meaning of s 459H of the Corporations Act 2001 (Cth), and that the rectification claim was not a genuine offsetting claim.
[4]
Consideration
I have considered all of the parties' written and oral submissions, although I do not consider it necessary to recount all of them in order to explain my reasons for the decision that I have arrived at.
[5]
The variations differential
I accept Infigo's submission that Mr Chedid's first affidavit does not support an application to set aside the statutory demand on the basis of the variations differential. It follows that the Court lacks jurisdiction to set aside the statutory demand on the basis of the variations differential, even if it were an offsetting claim. The variations differential is not an offsetting claim in any event, for the reasons explained below.
The applicable principles are clear. An application to set aside a statutory demand under s 459G of the Corporations Act is validly made only if it is filed together with "an affidavit supporting the application" within the 21-day statutory period. [6] In the context of an application to set aside a statutory demand on the basis that there is a genuine offsetting claim, the affidavit must provide the basis for establishing the existence of that bona fide claim, expressly or by reasonably available inference. Precisely what that requires, and what might reasonably be inferred from the affidavit and documents exhibited or annexed to it, will depend on the facts of the particular case. It is necessary to bear in mind in every case the summary nature of the procedure and the limited time available for the filing of the supporting affidavit, and that the court is to determine whether a genuine offsetting claim exists, and not to determine its merits. [7]
Linmas submitted that Mr Chedid's first affidavit supported an application to set aside the statutory demand on the grounds of the variations differential and the rectification claim by exhibiting its payment schedule and adjudication response. Linmas submitted that it was clear from the inclusion of those documents in the exhibits to Mr Chedid's first affidavit that Linmas maintained the position that it had adopted in its payment schedule and adjudication response, and that Infigo could not be in any doubt that Linmas was raising a claim that would effectively be "a re-run" of everything that was before the adjudicator.
I reject that submission. All that could reasonably be inferred from Mr Chedid's first affidavit was that, in the context of the building contract between Linmas and Infigo, and of the adjudication process and determination which Mr Chedid summarised in paragraphs 4 to 12 of his affidavit (exhibiting the documents generated through that process), Linmas asserted the claim against Infigo described in paragraphs 13 to 17 of his affidavit under the heading "Offsetting Claim". That is the claim for damages for breach of contract and negligence referred to in paragraph 16 of the affidavit, referable to the matters referred to in paragraphs 13 to 15 of the affidavit - allegedly incomplete and defective works, an allegation that the total amount paid by Linmas to Infigo for the building works to date (excluding the unpaid amount that is the subject of the statutory demand) exceeds the value of the building works, and liquidated damages. As I have explained at [29]-[30] above, Linmas no longer relies on the overpayment claim or the liquidated damages claim described by Mr Chedid as grounds for setting aside the statutory demand. The description of the offsetting claim in Mr Chedid's affidavit makes no mention of either the variations differential or of any claim in respect of that differential.
[6]
The rectification claim
The rectification claim described in paragraph 13 of Mr Chedid's first affidavit sworn on 3 April 2023 is a claim for costs that he asserted Linmas had incurred, and would incur in the future, to complete and rectify allegedly defective work. Mr Chedid's affidavit did not disclose that Linmas held the Property on trust for the Linmas Trust, that 2041House had replaced Linmas as trustee of the Linmas Trust with effect from 23 February 2023, that Linmas had executed a transfer of the Property to 2041House, and that the transfer was in the process of being assessed for stamp duty as at 13 March 2023, with a view to the transfer being registered. [13] Mr Chedid's second affidavit sworn on 31 May 2023 also failed to disclose those matters and the subsequent developments - that Linmas had been taking steps to complete the transfer of the Property to 2041House since 18 April 2023, and that 2041House had entered into a contract for the sale of the Property to a third party. The statement of claim that Linmas filed in the District Court on 30 May 2023 was also silent about those matters and simply pleaded that Linmas was the owner of the Property. [14]
Infigo submitted that the undisclosed matters render the rectification claim a fundamentally different claim from that described in Mr Chedid's first affidavit. The claim described by Mr Chedid is a claim for the actual costs incurred in the past, and to be incurred by Linmas in the future, in carrying out the work that it contends is necessary to complete the building works and to rectify the alleged defects. By contrast, Infigo submitted that the rectification claim articulated by Linmas at the hearing is a different claim for damages equivalent to the cost of making the building work conform to the contractual specification. For that reason, Infigo submitted that Linmas' application to set aside the statutory demand on the basis of its rectification claim as formulated at the hearing was not validly made in accordance with s 459G(3) of the Corporations Act, and that the Court therefore lacks jurisdiction to determine the application to set aside the statutory demand in so far as it relies on that rectification claim.
Linmas submitted that the rectification claim articulated at the hearing is the same claim as that which was identified in Mr Chedid's first affidavit. Linmas submitted that the transfer of the Property from Linmas to 2041House, and the subsequent contract for the sale of the Property from 2041House to a third party, are irrelevant to its rectification claim.
[7]
Conclusion
Linmas has failed to establish any of the grounds on which it ultimately relied in challenging the statutory demand. There will be an order dismissing the proceedings. I will hear the parties in relation to costs.
[8]
Endnotes
All monetary amounts have been rounded to the nearest whole dollar amount.
Proceedings 2023/192930. The freezing order application was determined on 29 June 2023 - see Infigo II Pty Ltd v Linmas Holdings Pty Ltd [2023] NSWSC 755.
My summary of Mr Chedid's evidence should not be understood as accepting the proposition that Linmas was able to enter into a contract with itself: Infigo II Pty Ltd v Linmas Holdings Pty Ltd [2023] NSWSC 755 at [62]-[63] (Meek J) (and the authorities there referred to); see also [65]-[82] of that judgment.
The evidence does not explain how the amount of $176,363 is calculated, and I am unable to reconcile it with the evidence summarised in [6]-[12] above. However, nothing material turns on that in these proceedings.
This involved an implicit concession by Linmas that the amount of $215,000 in Linmas' opening submissions was an error, and that the amount of the "differential" could be no more than $185,915, calculated as the sum of $188,520 that had been allowed by the adjudicator and the amount of $2,604 that had been accepted by Linmas (through Mr Winton) in its adjudication response.
Corporations Act, s 459G(3).
Ziegler as trustee for the Doris Gayst Testamentary Trust v Cenric Group Pty Ltd [2020] NSWCA 85 at [31]-[37] (Gleeson JA, Meagher and McCallum JJA agreeing); Sceam Construction Pty Ltd v Clyne (2021) 64 VR 404; (2021) 365 FLR 326; [2021] VSCA 270 at [38]-[42] (Ferguson CJ, Sifris and Walker JJA).
In the matter of Douglas Aerospace Pty Ltd (2015) 294 FLR 186; (2015) 33 ACLC 15-012; [2015] NSWSC 167 at [99] (Brereton J) (Douglas Aerospace).
Ibid at [45]-[100].
[2014] WASCA 91.
Douglas Aerospace at [98].
Ibid at [53]-[54] and [58]-[66].
See [27] above.
See [21]-[27] above.
(1954) 90 CLR 613; [1954] ALR 929; 28 ALJ 319; [1954] HCA 36 at 90 CLR 617-618 (Dixon CJ, Webb and Taylor JJ).
It follows that the Court has no jurisdiction in these proceedings to vary or set aside the statutory demand on the basis of any offsetting claim founded on the variations differential, because no application to set aside the demand on that basis was validly made in within the 21-day statutory period.
Even if I had determined that Mr Chedid's first affidavit did sufficiently raise an offsetting claim based on the variations differential, I would have held that this was not an offsetting claim within the meaning of s 459H of the Corporations Act.
At the hearing, counsel for Linmas initially submitted that this was a claim for restitution for overpayment of the $188,915 in circumstances where Infigo was not in truth entitled to that amount determined by the adjudicator in respect of variations. However, counsel for Linmas later conceded that an offsetting claim within the meaning of s 459H of the Corporations Act is a claim that the company presently has, and that Linmas does not presently have a restitutionary claim against Infigo in respect of the variations differential because Linmas has not paid any part of the adjudicated amount that is the subject of the judgment debt in respect of which Infigo issued the statutory demand. That concession was properly made. [8]
Counsel for Linmas then endeavoured to formulate the claim relating to the variations differential as a claim in contract arising under two specific provisions of the building contract. However, after identifying each of the provisions on which he relied, counsel promptly and correctly conceded that they did not confer any right on Linmas that would support a claim in respect of the variations that were incorporated in the adjudicated amount, at least prior to Linmas paying the amount of the adjudicator's determination and judgment debt to Infigo.
The third and final iteration of the alleged offsetting claim based on the variations differential propounded by counsel for Linmas during the hearing was a claim for declarations to the effect that Infigo was not entitled under the building contract to payment for specific variations, being those variations that the adjudicator had determined in Infigo's favour. It was submitted that s 32 of the SOP Act expressly permits Linmas to make such a claim, and that the claim would not be an appeal from or "direct attack on" the adjudication, because Linmas would simply be seeking declarations concerning the parties' rights under the building contract, and the claim would not even refer to the adjudication. Counsel for Linmas submitted that this claim for declaratory relief was an offsetting claim within the meaning of s 459H of the Corporations Act because the declarations, if made, would be "a complete answer" to the judgment debt for the adjudicated amount.
I reject those submissions. After undertaking an extensive analysis of relevant authorities in In the matter of Douglas Aerospace Pty Ltd, [9] Brereton J (as his Honour then was) followed the Court of Appeal of the Supreme Court of Western Australia in Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [10] in determining that an arguable claim that the adjudication does not reflect the true legal rights of the parties does not amount to an offsetting claim for the purpose of s 459H(1)(b) of the Corporations Act where there is no cross-demand for damages, and where there has been no payment and there is therefore no complete claim for restitution. As his Honour explained: [11]
"… a curial proceeding in which a party to a construction contract seeks, by way of enforcing its contractual rights, a declaration that an adjudicated amount is not truly due and payable is in a position closely analogous to one who applies to set aside a judgment, or to appeal from a judgment - essentially, the contention is that the adjudication, and thus the judgment founded on it, is wrong. Despite the width of the concept of 'offsetting claim', it has never been thought to extend to an appeal from, or application to set aside, a judgment. In the absence of payment of an amount of which restitution might be claimed, there is nothing to be set off against the judgment debt, but only a contention that the adjudication is in error. A contention that a debt does not exist is not a 'counterclaim, set-off or cross-demand'. Such a contention denies the debt, whereas a counterclaim, set-off or cross-demand admits it, but asserts that there is a countervailing liability. That the curial proceedings might produce a different result is no different from an appeal. The general principle that an appeal or application to set aside a judgment does not found a genuine dispute, or (at least without more) provide some other reason to set aside a demand, supports the conclusion that a claim that an adjudication does not reflect the true contractual rights of the parties does not amount to an offsetting claim."
Contrary to the submissions made on behalf of Linmas in the present case, it is not to the point that the claim for declaratory relief might be framed in terms that avoid referring to the adjudication. As a matter of substance, the claim for declaratory relief would be a contention that the judgment debt does not exist, rather than a counterclaim, set-off, or cross-demand. Moreover, that contention is unsustainable. As Brereton J explained, the judgment debt is indisputable so long as the judgment stands, notwithstanding that s 32 of the SOP Act preserves to the parties the right to contend for a different result in curial proceedings, and notwithstanding that any judgment in such curial proceedings can take the adjudication into account and make any adjustment necessary to give effect to what the court finds to be the true legal rights of the parties. [12]
For all of those reasons, the Court does not have jurisdiction to entertain Linmas' application to set aside the statutory demand on the basis that it has some offsetting claim in relation to the variations differential. However, even if I had been of the view that this ground of challenge was sufficiently identified in Mr Chedid's first affidavit to confer jurisdiction on the Court, I would have held that Linmas' foreshadowed claim for declaratory relief in respect of the parties' true contractual rights in relation to variations is not an offsetting claim within the meaning of s 459H of the Corporations Act, assuming for present purposes that Linmas' contention as to the parties' true contractual rights is arguable. I would therefore have declined to set aside or vary the statutory demand on account of that foreshadowed claim.
Where a landowner contracts to have a building work performed on their land, and the builder fails to perform the work in accordance with the contract and the specifications that form part of it, the damage incurred by the owner is the loss that they have sustained by reason of the builder's failure to perform its contractual obligations. In Bellgrove v Eldridge, the High Court said: [15]
"This loss cannot be measured by comparing the value of the building which has been erected with the value it would have borne if erected in accordance with the contract; [the owner's] loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so give to [them] the equivalent of a building on [their] land which is substantially in accordance with the contract.
…
The qualification, however, to which this rule is subject is that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt."
In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (Tabcorp), the High Court explained this "rule" as an application of the overriding principle that a party who suffers loss by reason of a breach of contract is to be placed in the same position as if the contract had been performed, so far as money is able to do that. [16] The High Court cited with approval the following passage from the judgment of Oliver J in Radford v De Froberville: [17]
"Now, it may be that, viewed objectively, it is not to the plaintiff's financial advantage to be supplied with the article or service which he has stipulated. It may be that another person might say that what the plaintiff has stipulated for will not serve his commercial interests so well as some other scheme or course of action. And that may be quite right. But that, surely, must be for the plaintiff to judge. Pacta sunt servanda. If he contracts for the supply of that which he thinks serves his interests - be they commercial, aesthetic or merely eccentric - then if that which is contracted for is not supplied by the other contracting party I do not see why, in principle, he should not be compensated by being provided with the cost of supplying it through someone else or in a different way, subject to the proviso, of course, that he is seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit."
The High Court referred to the qualification expressed in Bellgrove v Eldridge that the work must be necessary to produce conformity with the contract, and a reasonable course to adopt, and noted the example of unreasonableness given in that case: [18]
"No one would doubt that where pursuant to a building contract calling for the erection of a house with cement rendered external walls of second-hand bricks, the builder has constructed the walls of new bricks of first quality the owner would not be entitled to the cost of demolishing the walls and re-erecting them in second-hand bricks."
The High Court in Tabcorp stated that the example: [19]
"… tends to indicate that the test of 'unreasonableness' is only to be satisfied by fairly exceptional circumstances. The example given by the court aligns closely with what Oliver J said in Radford, that is, that the diminution in value measure of damages will only apply where the innocent party is 'merely using a technical breach to secure an uncovenanted profit'."
In Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [20] (Cordon), the Court of Appeal considered a claim by the registered proprietor of premises on which residential units had been developed for damages for breach of contract by the developer, measured as the cost of rectifying defects on that part of the property which became common property on registration of the strata plan and which had therefore vested in the owners corporation. The Court of Appeal held that the primary judge was justified in concluding, on the basis of the evidence adduced at trial, that the rectification work would not be carried out. The evidence given by the witnesses called by the former registered proprietor (Lesdor) was equivocal as to whether Lesdor intended to carry out the work, and there was no evidence that the owners corporation proposed to carry out the work or to call on Lesdor to do so. Bathurst CJ, with whom Macfarlan and Meagher JJA agreed, accepted that a possibility that rectification work will not be carried out does not preclude a claim for damages for the cost of the rectification work. Referring to Tabcorp, the Chief Justice also accepted that unreasonableness will only be established in exceptional circumstances. Nevertheless, His Honour held that: [21]
"The combination of the lack of intention to carry out the rectification work, the transfer of the property from Lesdor to the owners corporation and the absence of any evidence that the defects were affecting the use and occupation of the building or the common property leads, in my opinion, to the conclusion that it would be unreasonable to carry out the work and that damages for the cost of rectification should therefore not be awarded."
In coming to that conclusion, his Honour approved and applied the following observations about the nexus between intention or lack of intention to carry out rectification work and unreasonableness in Westpoint Management Ltd v Chocolate Factory Apartments Ltd (Westpoint): [22]
"59 Relevance of the plaintiff's intention to carry out the rectification work to reasonableness is accepted in, for example, Chitty on Contracts, 29th ed, at 20-016, and Hudson's Building and Engineering Contracts, 11th ed at 8-138. It appears to have been accepted in De Cesare v Deluxe Motors Pty Ltd - indeed, sale of the building may have relevance through whether or not the rectification work will be carried out. If truly going to reasonableness, I do not think consideration of whether or not the plaintiff will carry out the rectification work is inconsistent with Bellgrove v Eldridge, since the regard to it is part of arriving at the plaintiff's compensable loss. Once there is compensable loss, the court is not concerned with the plaintiff's use of the compensation.
60 But the plaintiff's intention to carry out the rectification work, it seems to me, is not of significance in itself. The plaintiff may intend to carry out rectification work which is not necessary and reasonable, or may intend not to carry out rectification work which is necessary and reasonable. The significance will lie in why the plaintiff intends or does not intend to carry out the rectification work, for the light it sheds on whether the rectification is necessary and reasonable. Putting the same point not in terms of intention, but of whether or not the plaintiff will carry out the rectification work, whether the plaintiff will do so has significance for the same reason, and not through the bald question of whether or not the plaintiff will carry out the rectification work. That question is immaterial, see Bellgrove v Eldridge.
61 So if supervening events mean that the rectification work can not be carried out, it can hardly be found that the rectification work is reasonable in order to achieve the contractual objective: achievement of the contractual objective is no longer relevant. If sale of the property to a contented purchaser means that the plaintiff did not think and the purchaser does not think the rectification work needs to be carried out, it may well be found to be unreasonable to carry out, the rectification work. An intention not to carry out the rectification work will not of itself make carrying out the work unreasonable, but it may be evidentiary of unreasonableness; if the reason for the intention is that the property is perfectly functional and aesthetically pleasing despite the non-complying work, for example, it may well be found that rectification is out of all proportion to achievement of the contractual objective or to the benefit to be thereby obtained."
As Bathurst CJ observed in Cordon, the question of whether it is reasonable to carry out the rectification works is a question of fact in each case. [23]
Counsel for Linmas relied on the subsequent Court of Appeal decision in Rialto Sports Pty Ltd v Cancer Care Associates Pty Ltd [24] (Rialto) as support for his submission that a change of ownership of the property is irrelevant to the former owner's entitlement to damages for the cost of rectification works which may not be carried out. Counsel emphasised that, in Rialto, the strata lot owners were held to be entitled to such damages in respect of remedial works to the common property, notwithstanding that the lot owners had never been owners of the common property. However, that case turns on its own facts and does not support the general proposition advanced by counsel for Linmas. In Rialto, the lot owners' claims were made against the owner of the property from whom they had purchased their lots off the plan under contracts containing covenants that the building would be constructed in a proper and workmanlike manner. The defects to the common property related to combustible aluminium cladding and waterproofing issues. Gleeson JA, with whom Bell CJ and Macfarlan JA agreed, held that the lot owners had suffered loss by reason of the defects to the common property, being a diminution in the value of each lot owner's proprietary interest in the common property as an equitable tenant in common with the other lot owners. The lot owners were therefore entitled to damages against the owner for breach of those covenants. Rectification works were necessary, and it was reasonable for those works to be carried out. In those circumstances, the cost of those works was the appropriate measure of damages, notwithstanding the possibility that the works may not be carried out by the owners corporation (which was controlled by the vendor/owner). Rialto represents an application of the principles to which I have referred at [49]-[55] above to the particular circumstances of that case.
Turning to the present case, I reject Infigo's submission that the rectification claim on which Linmas relies in challenging the statutory demand is a different claim from that which was described in Mr Chedid's first affidavit. It is the same claim for damages for alleged breaches of contract, measured as the cost of undertaking work that Linmas contends is necessary to rectify the alleged defects. As the authorities discussed above make plain, it is not an essential element of such a claim that the claimant will carry out the rectification works and will incur those costs. The matters referred to at [27] above, which first became known to Infigo through other proceedings in this Court, do not change the character of the claim. However, they are relevant to the claim, as discussed further below. Accordingly, the Court has jurisdiction to determine Linmas' application to set aside the statutory demand on the basis that of rectification claim.
In Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (Grandview), Bell P (as the Chief Justice then was) addressed what is required in order to demonstrate the existence of a genuine offsetting claim: [25]
"61. … it is desirable to say something as to the meaning of the word 'genuine' in the context of the definition of 'offsetting claim' in s 459H(5) of the Corporations Act and how it has been interpreted in the case law. ...
62. In Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation (2006) 94 SASR 269; [2006] SASC 91 at [46]-[49] per Debelle J (with whom Besanko and Layton JJ agreed) said:
'[46] The meaning of the expression "offsetting claim", like the meaning of "genuine dispute" has been illuminated by analogies found in applications for injunctions to restrain the commencement, advertisement and prosecution of winding-up proceedings pre-dating the enactment of s 459G and in the opposing of a notional application by the person who has served the statutory demand for summary judgment against the company for the debt the subject of the demand: Chase Manhattan at 136. Thus, when deciding whether an offsetting claim exists, the test is whether the court is satisfied that there is a serious question to be tried that the person on whom the demand has been served has an offsetting claim: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 12 ACSR 341 at 357, or that the claim is not frivolous or vexatious: Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37, or that it is not fictitious or merely colourable: Edge Technology Pty Ltd v Lite-on Technology Corporation [2000] NSWSC 471; (2000) 156 FLR 181 at 184-5, citing Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 13 ACSR 787.
[47] The test whether an offsetting claim exists is the same as for a genuine dispute, that is to say, the claim must be bona fide and truly exist in fact and that the grounds for alleging the existence of the dispute are real and not spurious, hypothetical, illusory or misconceived. The issue is whether the offsetting claim is bona fide, real and not spurious: Edge Technology per Santow J at [25].
[48] I do not think that the test identified by Santow J imposes a more onerous task on the party disputing the statutory demand than the serious question test. The expression "good faith" means arguable on the basis of facts asserted with a sufficient particularity to enable the court to determine that the claim is not fanciful: Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 per Palmer J. McPherson JA expressed the same concept in these terms in JJMMR Pty Ltd v LG International Corporation [2003] QCA 519 at [18]:
"Anyone can make a claim to a right of setoff against a creditor. What the definition in s 459H(5) requires, however, is that it be 'genuine'. The same word in s 459H(1) has already elicited so many synonyms and shades of meaning that it will not help to add more. Its antithesis is to be seen in the word 'artificial'. The claim to set off against the debt demanded must not have been manufactured or got up simply for the purpose of defeating the demand made against the company. It must have an existence that is objectively demonstrable independently of the exigencies of the demand that evoked it.
The observations of Palmer J and McPherson JA were applied by Chesterman J in Cooloola Dairies Pty Ltd v National Foods Milk Ltd [2004] QSC 308; [2005] 1 Qd R 12."'
63. In addition to these valuable observations, reference should be made to the judgment of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787 where his Honour, having characterised the test for whether or not there was a 'genuine claim' in terms of whether there was 'a plausible contention which requires investigation', went on to say:
'This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit "however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be" not having "sufficient prima facie plausibility to merit further investigation as to [its] truth". (cf Eng Mee Yong v Letchunanan [1980] AC 331 at 341), or "a patently feeble legal argument or an assertion of facts unsupported by evidence": cf South Australia v Wall (1980) 24 SASR 189 at 194.'
64. The Victorian Court of Appeal has spoken of 'prima facie plausibility' in this context: TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; 66 ACSR 67 at [71]; see also Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 at [48]-[49].
65. Most recently, in In the matter of Citadel Financial Corporation Pty Ltd [2019] NSWSC 65 at [30], White JA said:
'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 (Re Morris Catering (Australia) Pty Ltd(1993) 11 ACSR 601 at 605; Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 at [48] and [49]). It is sufficient if there be a plausible contention requiring investigation (Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd at [70]). 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 (TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 at [71] cited with approval in Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd at [52]-[53]).'"
Bell P had earlier observed that: [26]
"8. The establishment of an offsetting claim for the purposes of s 459H does not, of course, constitute a finding that the claim is a good one, or that it has been made out. It represents nothing more than a finding that there is a serious question as to the existence of an offsetting claim or an issue deserving of a hearing as to whether the company has such a claim against the creditor and that a claim is made in good faith and is arguable and not frivolous or vexatious: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 47 FCR 451 at 460, 467 per Beazley J (as her Honour then was); In the matter of Oztec Pty Ltd [2012] NSWSC 1234 at [22] per Black J…"
White JA and Sackville AJA agreed with Bell P. [27]
In the present case, Linmas has not adduced sufficient evidence to establish that its rectification claim is a genuine offsetting claim. The payment schedule and adjudication response (including Mr Winton's report) exhibited to Mr Chedid's first affidavit pre-date Linmas' removal as trustee of the Linmas Trust, its transfer of the Property to the new trustee, and the sale of the Property by that new trustee to a third party. Mr Chedid's evidence does not add to these documents in any meaningful way. Mr Chedid merely describes the incomplete works identified in those documents as issues in respect of which "Linmas has incurred and is set to incur costs to complete and rectify defective work." Mr Chedid is the solicitor for Linmas. The evidence does not point to Mr Chedid having any personal knowledge of either the alleged defects or whether Linmas intends to undertake any work to rectify those defects. Counsel for Linmas acknowledged that this statement in paragraph 13 of Mr Chedid's first affidavit was, in substance, a submission based on the adjudication response. Accordingly, the statement itself has no evidentiary weight, and rises no higher than the adjudication response.
Neither the adjudication response nor any other evidence adduced by Linmas establishes a plausible contention requiring investigation that, notwithstanding all of the matters referred to at [27] above, rectification of the defects described at [10] above can be carried out, and that it is reasonable to carry out that work. Linmas did not raise any contention, even in submissions, that it can carry out the rectification work, notwithstanding that the Property has already been transferred to 2041House and is about to be transferred to Co-Living. Nor did Linmas contend that the value of the Property or the price at which the Property has been sold to Co-Living were diminished by reason of the allegedly incomplete and defective work. Nor did Linmas identify how any such diminution would arguably represent a loss to Linmas, as opposed to the Linmas Trust and 2041House as the new trustee of that Trust.
Counsel for Linmas initially submitted that the sale of the Property was simply irrelevant. I reject that submission, which is inconsistent with the decisions in Cordon and Westpoint to which I have referred above.
Inconsistently with his initial submission, counsel for Linmas then submitted that Linmas was not required to adduce any evidence in these proceedings touching on the reasonableness question because "it is ultimately a factual issue" whereby "[i]f your Honour can see there is scope for my client to demonstrate reasonableness and necessity, then there is an arguable case in the sense that expression is used on an application for an injunction, or, in the General Steel sense, my client doesn't need to go further and positively satisfy your Honour on this application." I reject that submission as an inaccurate gloss on what an applicant seeking to set aside a statutory demand on the basis of a genuine offsetting claim must establish. What Linmas was required to establish in these proceedings were plausible contentions (as distinct from spurious assertions) that the rectification work underpinning its offsetting claim was necessary, and that it was reasonable to carry out that work in the circumstances referred to at [27] above. Linmas adduced no evidence from any witness bearing on reasonableness in those circumstances, and did not identify material within the three volumes of documentary evidence that supported plausible contentions that it was reasonable to carry out the work in those circumstances.
During the hearing, I pressed counsel for Linmas to identify any evidence relied on in support of the submission that there was "scope" to demonstrate reasonableness at trial, counsel for Linmas answered:
"There are two ways I can put it. I can put it that the defendant shouldn't have the benefit of being paid for work that is defective. It can be characterised as what is the true value of the work carried out by the defendant? The adjudicator valued it at X and said my client has to pay $188,000 for variations, some other bits and pieces and $200,000 on account of the work carried out.
So, another way to characterise the case is that the value of the work is not as asserted and as found by the adjudicator, to the point that my client doesn't even have to get into the … Cordon question.
…
Another way my client can put its case is not that rectification is necessary and reasonable, is simply that the value of the works was somewhat less than found by the adjudicator."
I understand this response to my question - which simply formulated a restitutionary claim in the alternative to a claim for damages for breach of contract - as a concession that there is no evidence in these proceedings that supports Linmas' submission that there is "scope" for it to demonstrate reasonableness at trial.
Counsel returned to this alternative claim in his submissions in reply at the conclusion of the hearing. Counsel referred me to Infigo's claim in its payment claim/adjudication application that the value of the contract works was $2,180,734, Linmas' contention in its payment schedule/adjudication response that the value was only $1,810,993, and the adjudicator's determination that the value was $2,129,164. [28] Counsel submitted that: "That's an alternative way of casting the differential".
I consider it doubtful that this alternative claim - for restitution of the difference between Linmas' $1,810,993 valuation of the contract works and the adjudicator's valuation of $2,129,164 - was supported by Mr Chedid's first affidavit. That affidavit did identify a different claim for restitution of any amount said to represent the difference between Linmas' $1,810,993 valuation of the contract works and the amount that it has paid to date in respect of the contract works. Linmas abandoned any reliance on that claim as offsetting claim at the hearing, as referred to at [28]-[29] above.
In any event, the alternative referred to at [65]-[67] above is a claim for restitution of an amount that includes the value of works for which Linmas has not yet paid. That is because the adjudicator's valuation of $2,129,164 includes part of the adjudicated amount that is the subject of the judgment debt, which Linmas has not paid. [29] That is not a genuine offsetting claim. [30]
For all of those reasons, the evidence before the Court in these proceedings did not establish that the rectification claim - in either of its formulations - is a genuine offsetting claim in the sense explained in Grandview.
Belgrove v Eldridge at 218; Tabcorp at [17].
At [17].
[2012] NSWCA 184.
Ibid at [230].
[2007] NSWCA 253 at [59]-[61] (Giles JA, McColl and Campbell JJA agreeing).
Cordon at [214].
[2022] NSWCA 146.
(2019) 99 NSWLR 397; (2019) 136 ACSR 563; [2019] NSWCA 60 at [61]-[65] (White JA and Sackville AJA agreeing).
Ibid at [8] (White JA and Sackville AJA agreeing).
Ibid at [93]-[96] (White JA) and [98]-[100] (Sackville AJA).
See [6]-[12] above.
See [12] above.
Douglas Aerospace at [99].
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Decision last updated: 07 July 2023