Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd

Background and affidavit evidence

1. I should first set out the background to the application and the evidence that was led. The Demand claims the amount of $6,594.50, and is verified by an affidavit of Mr Matthew Volpatti sworn on 10 July 2017. That amount is identified as the balance of monies due for a tax invoice dated 23 December 2016 issued by Autolift to Trico. The verifying affidavit of Mr Volpatti sworn 10 July 2017 refers to the amount claimed and confirms his belief that there is no genuine dispute about the existence or amount of the debt.
2. I do note that Trico has accepted, albeit possibly belatedly, that an amount is due to Autolift and, by letter dated 23 October 2017, sent a cheque to Autolift in the amount of $1,094.50 in payment of that amount. The case therefore involves an underlying claim of in the order of $5,400, although I accept that it has significance, at least, for Trico, so far as a failure to set aside the Demand, followed by non-payment, would give rise to a presumption of insolvency and for Autolift since, if it cannot proceed by the creditor's statutory demand procedure, then the costs of recovering the debt may ultimately be disproportionate to the amount involved.
3. The circumstances which give rise to the claim are addressed in an affidavit of Mr O'Shea dated 3 August 2017 on which Trico relies and in a detailed affidavit of Mr Trewhella dated 8 September 2017 on which Autolift relies. Mr O'Shea's evidence annexes relevant documents, including a quotation provided by Autolift to Trico for the installation of garage doors at residential premises being constructed in Balmain. That quotation provided for the installation of two overhead garage doors, primed ready for Trico (for its contractor) to fit timber boards. Mr O'Shea accepts that Autolift installed the garage doors the subject of the contract but claimed, in evidence which I admitted to establish the nature of the asserted offsetting claim, that: "[Autolift] was delayed with installation of the doors. The delays were not caused by or contributed to by Trico. The delays arose because [Autolift] did not managing [sic] the installation correctly."
4. That affidavit also annexes a payment schedule in answer to the payment claim, although it appears that the matter did not subsequently proceed to an adjudication. That payment schedule identified a dispute concerning the claim, or what is in this context an offsetting claim, as follows: "Failure to complete works by contractual due date. Autolift state doors were installed by 23.12.16 and the delay was encountered due to balancing occurring on the 6.01.17. Claim is rejected due to breach of the below contractual term: 'Allow for staging of works to conform with construction program.' If doors were installed on final day of contractual completion date, balancing could not occur on same day due to insufficient time for cladding. Contractor has thereby failed to meet completion date. Additionally bracketts [sic] housing springs were incorrect and not installed by completion date."
5. The latter matter was not the subject of any substantive submissions at this hearing.
6. The subcontractor works agreement in turn provides that the subcontractor, Autolift, agrees to comply with Trico's program requirements including commencement of "Trade Works" on 19 December 2016 and completion of "Trade Works" no later than 23 December 2016. A fundamental difficulty in this case, which is one of the matters that supports an offsetting claim, is the fact that the concept of "Trade Works" adopted in the subcontractor works agreement is not adequately defined. Clause 6 of the general terms and conditions provides for Autolift, when claiming an extension of time, to notify Trico in writing of their intention to make a claim and provides that, if no claim is made in accordance with cl 6, no extension of time will be approved. Clause 8 provides a warranty as to the design of the subcontract works. Clause 33 provides that Autolift will, inter alia, be responsible for carrying on all commissioning in accordance with the specifications and subcontract. An annexure to the subcontractor works agreement, setting out a scope of work, in turn sets out the work that is involved under the heading "trade specific", which covers the steps up to the priming of the doors, to be ready for the installation of timber cladding (cladding by others) but does not extend further to the stage of balancing or commissioning the doors.
7. Autolift in turn relies on an affidavit of Mr Trewhella dated 8 September 2017 which provides a comprehensive account of events in respect of the installation of the garage doors. Mr Trewhella distinguishes between two stages, being the supply and installation of those doors, which he describes as "Trade Works", so that the doors were ready for Trico to fit timber boards by way of cladding, and after the cladding was installed by Trico, for Autolift to make final operational adjustments of a specified manner, which he describes as "commissioning". That evidence was not contested by further evidence led by Trico, but Mr Trewhella's description of "Trade Works" finds no express support in the subcontractor works agreement by any definition of that concept.
8. Mr Trewhella also gives evidence, which I accept is both persuasive and uncontested by evidence led by Trico in response, as to difficulties which affected Autolift's performance of the relevant works, including inaccurate information which had been provided to it as to the floor levels in the garage, and then that it was not able to access the first of the garage areas when it attended to perform works on 20 December 2016 due to their then condition, being filled with building supplies and materials, and that it was then informed of a change to the floor height, which prevented it completing the works on 20 December 2016 in respect of the first garage. Mr Trewhella also refers, and this evidence is again uncontested, to a subsequent conversation when he was informed by a representative of Trico that cladding would be completed by 6 January, and that Autolift could return to commission the door after that date, and to the fact that Autolift in turn returned to commission the door by that date.
9. Mr Condon places significant weight on those conversations as indicating Trico's acceptance that the work would not be completed until 9 January 2017, and I accept that those conversations, which were not contested, establish that matter. It does not, however, as will emerge below, follow that there is no genuine issue as to the contractual consequences of the work not being completed until that date, however that came about.
10. Pausing there, it seems to me that there is a significant prospect that, at a hearing on the merits, a Court would find that Autolift's ability to complete the work had been impeded as a matter of fact by the matters to which reference is made in Mr Trewhella's affidavit. That does not however displace the fact that this hearing is not a hearing on the merits, but a hearing to determine whether a genuine offsetting claim is established in respect of the Demand.

Applicable legal principles

1. I turn now to the applicable legal principles. Section 459H(1)(b) of the Corporations Act provides that an offsetting claim is the amount of a claim or claims that a company has against the person who served a statutory demand by way of counterclaim, set-off or cross-demand, whether or not that amount arises out of the same transaction or circumstances as the debt to which the demand relates. If the court is satisfied that the company has an offsetting claim, then the court is required to calculate the "substantiated amount" of the demand by deducting the offsetting claim from the admitted amount of the debt: s 459H(2).
2. The case law establishes that a company can establish an "offsetting claim" if there is a "serious question to be tried" or "an issue deserving of a hearing" as to whether the company has such a claim against the creditor and that claim is made in good faith and is arguable and not frivolous or vexatious: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 47 FCR 451; 120 ALR 173; 12 ACSR 341 at 356-357. In Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 at 605, Thomas J in turn observed that, in assessing an offsetting claim: "beyond a perception of genuineness (or the lack of it) the court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another. The essential task is relatively simple - to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it)."
3. In Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 at [30]-[31] and [39]-[55], the Court of Appeal in turn referred to the relatively low minimum requirements for demonstrating an offsetting claim. The Court of Appeal there noted (at [30]) that: "It is settled law that s 459H requires the Court to be satisfied that there is a "serious question to be tried": see Scanhill v Century 21 Australasia at 467, or 'an issue deserving of a hearing' as to whether the company has such a claim against the creditor: see Chase Manhattan Bank Australia Limited v Oscty Pty Limited [1995] FCA 1208; 17 ACSR 128 at [42] per Lindgren J; Eumina Investments Pty Ltd v Westpac Banking Corp [1998] FCA 824; 84 FCR 454 per Emmett J (as his Honour then was). The claim must be made in good faith: Macleay Nominees v Belle Property East Pty Ltd. In that case, Palmer J observed, at [18], that good faith, in this context, meant that the offsetting claim was arguable on the basis of facts that were asserted 'with sufficient particularity to enable the Court to determine that the claim is not fanciful'."
4. The Court of Appeal also there observed (at [36]) that there must, relevantly, be evidence that satisfies the court that there is a "serious question to be tried" or "an issue deserving of a hearing" or a "plausible contention requiring investigation" of the existence of an offsetting claim. The Court of Appeal also emphasised at [47] that the court's role is: "to determine whether there was plausible evidence to establish the existence of a genuine dispute [or offsetting claim], not whether the evidence was disputed or even likely to be accepted on a final hearing of any such claim."
5. Mr Condon also refers to my decision in Re Tesrol Holdings Pty Ltd [2013] NSWSC 1534; (2013) 97 ACSR 9 that a serious question to be tried would not be established by merely a non-admission of a debt. That is not the basis on which Trico puts its case, which is that there was late completion of the works on an arguable construction of the contract, giving rise to a claim under the liquidated damages provisions. Mr Condon also refers to my recent decision in Re EPAQ International Pty Ltd [2017] NSWSC 1399, where I referred to appellate authority that the court must "guard against setting the threshold too low for that is liable to defeat the legislative purpose of the section". It seems to me that that decision does not assist Autolift, because the matters to which I will refer below are such as to establish a genuinely arguable offsetting claim, on a genuinely arguable construction of the contract, applying the traditional standards for such a test. The fact that, as I will note below, Autolift has an arguable, or strongly arguable, defence under the prevention principle is not such as to displace that genuinely arguable claim.

Parties' submissions

1. Trico's case, as put by Mr Kozlowski, solicitor, is essentially a very simple one. Trico submits that it has a genuinely arguable offsetting claim, because "Trade Works" as defined in the subcontract includes all of the work to be done by Autolift, the contract provided for Trade Works to be completed by 23 December 2016 and provided for liquidated damages for delay and, as is common ground, commissioning was not completed until 9 January 2017, for whatever reason. Mr Kozlowski submits that, in those circumstances, there is a genuinely arguable offsetting claim for liquidated damages in the amount of $1,200 per day for the period of the delay. Mr Kozlowski in turn relies on the payment schedule, and on the fact that Autolift did not proceed with adjudication under the Building and Construction Industry Security of Payment Act 1999 (NSW), although he ultimately, rightly, accepted in oral submissions that the payment schedule adds nothing to the factual matters which might otherwise underlie the offsetting claim on which Trico relies.
2. The case put by Mr Condon for Autolift is more complex. Mr Condon submits, first, that the Court should find that the concept of "Trade Works" as defined in the subcontract did not include commissioning, and that the question of delay giving rise to an offsetting claim does not arise. Mr Condon refers to aspects of the operation of the contract which would support that contention. Mr Condon points out that if the concept of "Trade Works" is read in the way in which Trico seeks to read it, then it must follow that Autolift had committed itself to liability for liquidated damages, for however long a delay might have arisen from the work done by Trico or its contractor which was to install panelling on the doors, because it could not commission the doors until that work was complete. I accept the force of that submission. However, that submission has a difficulty that the subcontract, if read in the way that Autolift contends, would have the result that Autolift had committed to undertaking the preliminary works, prior to cladding of the doors by 23 December 2016; had committed to undertaking the commissioning works, which are specifically within its responsibilities under the subcontract; but had not committed to when it would do so. Mr Condon submits that a term that that work would be done within a reasonable time would be implied. I accept that may well be so, but that falls well short of the commitment for which Trico had arguably sought to contract, namely compliance with its construction program.
3. I identify these alternate constructions of the subcontract not to conclude that one of them is preferable to the other, although, as a matter of impression, it seems to me that Autolift's submission may well be more plausible than Trico's. The difficulty is, more fundamentally, that there are two competing constructions of the subcontract, both of which result from the insufficiency of the definition of "Trade Works", and both of which have inconvenient consequences for one or the other party. That is an example of the sort of matter which a court cannot, and should not, finally determine in a summary application of this kind. In those circumstances, having regard to the case law as to when an offsetting claim arises, it seems to me that Trico's contention that "Trade Works" included commissioning, and its consequence as to Autolift's liability for liquidated damages, gives rise to an offsetting claim.
4. Mr Condon also submits that it is not open to Trico to rely on the provision of the subcontract permitting liquidated damages, by reason of the "prevention" principle, namely that a contracting party cannot rely upon its own delay to invoke a liquidated damages clause. Mr Condon draws attention to the decision of Mazza J in Gold City Developments Pty Ltd v Portpride Pty Ltd [2010] WASC 148 where his Honour referred (at [54]ff) to the elements of that principle; to a possible exception to that principle where an extension of time provision exists in a contract, as it does here, and is not invoked; and to the proposition, which his Honour accepted, that that exception did not apply where delay had actually been caused by a party which was aware of the delay. It seems to me that that is a contractual question of some subtlety, and the Court could not be satisfied, in a summary application of this kind, that the contrary could not be put as a serious proposition or that it is clear beyond doubt that the prevention principle would be available to Autolift here. That can readily be tested, consistent with the authorities, by asking whether Autolift could have obtained summary judgment by reliance on the prevention principle, had Trico brought a case against it claiming under the liquidated damages provision. It does not seem to me that summary judgment could have been given to dismiss such a claim, in circumstances that this raises both questions of fact and questions as to the operation of the prevention principle that are open to legal argument.
5. In summary, it seems to me that, applying the well-established principles to which I have referred above, Trico has a genuinely arguable offsetting claim that the concept of "Trade Works" in the relevant subcontract included commissioning; commissioning occurred late; a claim under the liquidated damages provisions is genuinely arguable, although it may well not be more likely than not to succeed; and Autolift's reliance on the prevention principle, while it may well succeed at a final hearing, would not be sufficient to allow summary dismissal of such a claim or to displace a genuine question to be tried in respect of such a claim.
6. In these circumstances, I find that an offsetting claim is established, in respect of the amount quantified by Trico, and the amount claimed in the Demand would need to be reduced, irrespective of the fact that a payment has now been made by Trico. It is not necessary to consider the effect of that payment because, in any event, the substantiated amount under s 459H of the Corporations Act would be less than the statutory minimum and the Demand would have to be set aside.
7. I should add, returning to the proposition with which I began this judgment, I can understand that it may well be disappointing to a party that has a strong claim for payment of a debt that its creditor's statutory demand for that debt is set aside. However, it seems to me that that result must be approached with a proper understanding of the creditor's statutory demand regime, and the fact that it is not properly available for debts where there is a genuine dispute or an offsetting claim. Once that is understood, then the result in this case is predictable.
8. For these reasons, I order that the creditor's statutory demand served 14 July 2017 by Autolift Garage Doors Pty Ltd on Trico Constructions Pty Ltd be set aside. I will hear the parties as to costs, since they have each foreshadowed that they wish to be heard in that respect.

Costs

1. The usual position, reflecting the compensatory purpose of an order for costs, is that a party which is successful in an application to set aside a creditor's statutory demand will be awarded its costs of the proceedings. In this case, each of the parties contended for a somewhat different position.
2. Mr Kozlowski contended that there should be an order for indemnity costs in favour of Trico on two bases. The first referred to correspondence, prior to the commencement of the proceedings, identifying a "genuine dispute" in respect of the debt claimed. That is consistent with the fact that, as I noted in my substantive judgment, the application to set aside the Demand was initially brought as an application relying on s 459H(1)(a) of the Act, although Mr Condon had recognised in submissions that it was in truth an offsetting claim case, and Mr Kozlowski ultimately also adopted that position. It seems to me that correspondence from Trico's solicitors that misidentifies the basis on which the claim could succeed does not advance its position for anything more than costs on the ordinary basis.
3. Mr Kozlowski also relies on a letter dated 8 August 2017 as supporting an order for costs on an indemnity basis. That letter proposed that Autolift should withdraw the Demand, pay Trico's costs, and agree to a waiver of further claims as between the parties and enter into a deed containing a confidentiality clause. It seems to me that letter does not support a claim for indemnity costs, because there was nothing unreasonable in Autolift not accepting that offer. Whatever the position in respect of the Demand, the amount of costs claimed by Trico may then have been unclear to Autolift; the offer was sent only shortly after the proceedings had commenced; and, perhaps most fundamentally, it required Autolift to abandon a claim for the balance of the debt it claims which, if brought as proceedings in a court having appropriate jurisdiction, may have strong prospects of success. On that basis, it seems to me that it was reasonable for Autolift not to accept that offer. The position might have been different had a different offer been made that Autolift should withdraw the Demand and bring proceedings for the claim in a court of appropriate jurisdiction. For that reason, I am not persuaded that I should make an order for indemnity costs in favour of Trico.
4. Mr Condon in turn refers to the fact that Trico did not offer, until the very end, to pay the amount that it now accepts was due to Autolift. It does not seem to me that that matter takes Autolift further because, although an amount of $1,094.50 is admitted as being due to Autolift, and has now been paid, that would have been beneath the statutory minimum and could not have supported the Demand. Mr Condon also points to a letter dated 24 October 2017, yesterday, by Autolift's solicitors to Trico's solicitors, which had offered to set aside the Demand on the basis that Trico pay Autolift's costs as agreed or as assessed. It seems to me that that letter does not assist Autolift. Trico could reasonably not accept that offer, in circumstances where it could anticipate that it would be, and was, ultimately successful in the application. Mr Condon also refers to the fact that Trico did not succeed on the basis identified in Mr Kozlowski's submissions. I do not accept that submission. While Mr Kozlowski was brief in his submissions, and did not explore the detail of the cases to the extent that Mr Condon had done, he identified an offsetting claim and the simple basis on which Trico put its case and, in the event, that offsetting claim was established on the simple basis on which it was put.
5. In these circumstances, it seems to me that neither party has established a basis to depart from the usual order as to costs. Accordingly, I order that the Defendant pay the Plaintiff's costs of the proceedings, as agreed or as assessed.

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