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

Principles

1. The principles in relation to an offsetting claim are not in dispute in these proceedings. As noted by Robb J in In the matter of J Group Constructions Pty Ltd [2015] NSWSC 1607; (2015) 303 FLR 139, where a party serves a statutory demand based upon a judgment obtained by filing in that case an adjudication certificate under the SOPA, the company served with a statutory demand cannot claim it has a genuine dispute under section 459H(1)(a) of the Corporations Act 2001 (Cth) (the Act). However, the company can mount an offsetting claim under section 459H(1)(b) if it has a counter claim, set-off or cross-demand that does not deny the debt but asserts a countervailing liability: at [93], [101]. More recently in In the matter of Vista Del Mare Pty Ltd [2020] NSWSC 938, Black J noted that the SOPA does not prevent a defendant asserting a "true" offsetting claim such as a cross-claim for damages for negligence or breach of contract, or recovery of the amounts overpaid in opposition to a claim under the SOPA or in contesting a creditor's statutory demand based on such a claim: at [11] citing In the matter of Douglas Aerospace Pty Ltd [2015] NSWSC 167.
2. As Barrett J described it in Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2010] NSWSC 1017 at [13]: The essence of the "offsetting claim" concept is the ability of the claimant to assert in an offensive way a right which, if found to have substance, will result in the actual recovery by that claimant of a sum of money which, if not precisely quantifiable to the last dollar and cent, can be seen to be of a fairly quantifiable or calculable amount.
3. Drawing on my judgment in In the matter of Fujian Xingxing Restaurant Pty Limited [2020] NSWSC 1131, the threshold to establish an offsetting claim is a relatively low one. Black J conveyed the principles in In the matter of Gorji Property Investment Pty Ltd [2018] NSWSC 1671 at [14]: … In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 at 464, the Full Court of the Federal Court held that a "genuine dispute" must be bona fide and truly exist in fact, and the ground for that dispute must be real and not spurious, hypothetical, illusory or misconceived. In Panel Tech Industries (Aust) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 at [18], Barrett J (as his Honour then was) formulated that proposition as follows, in a proposition applied in subsequent cases: "Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger."
4. In Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344, the Court of Appeal (Beazley P, Meagher and Gleeson JJA) said in the context of an offsetting claim, at [30]: 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 [Pty Ltd (1993) 47 FCR 451] 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 [[2001] NSWSC 743]. 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". Their Honours make it clear that a similar standard of proof is required whether an offsetting claim or a genuine dispute is alleged.
5. It is not for the Court to engage in an assessment of a deponent's credit on an application such as this: Britten-Norman at [46]. What is called for is an assessment of the kind described by McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787 (approved in Britten-Norman at [46]) (citations omitted): 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", or "a patently feeble legal argument or an assertion of facts unsupported by evidence".
6. In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67, Dodds-Streeton JA, with whom Neave and Kellam JJA agreed put the test in the following terms, at [71]: As the terms of s 459H of the Corporations Act and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. …
7. Often cited is the judgment of Thomas J in In the matter of Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 at 605, which provides useful guidance: It is often possible to discern the spurious, and to identify mere bluster or assertion. But 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).

Facts

1. In July 2017, HWC Contracting entered into a service agreement with Heworth Construction Pty Ltd under which HWC Contracting was to appoint subcontractors based on the features of various construction projects and to carry out the role of superintendent on an ongoing basis. In return for these services, Heworth Construction agreed to pay a fee to HWC Contracting and, in clause 6.0 of the service agreement, gave the following warranty: 6.0 PRINCIPAL'S WARRANTIES The Principal hereby warrants that the Agents shall not be liable for: (a) The construction means, methods and techniques employed by contractors in the performance of their contracts provided that the Agents carries out its duties under this Agreement with due skill, care and diligence … (d) The failure of any contractor to carry out the work under any contract in accordance with the contract.
2. It is particularly sub-clause (a) which may have some relevance here as contractual documents issued between these parties more recently suggest that Heworth Construction considers that HWC Contracting failed to carry out its duty under this sub-clause with due skill, care and diligence when retaining Lidco on the construction project which gave rise to the statutory demand.
3. More relevantly, in August 2019, a scope of works was issued by Heworth Construction in respect of a project in Oxford Street, Bondi Junction in respect of aluminium windows, doors and curved glass balustrade. On 30 September 2019, Lidco entered into a subcontract with HWC Contracting to provide aluminium windows, doors and curved glass package for $1.435 million plus GST. The subcontract contains the usual terms requiring Lidco to exercise skill, care and competence in performing the work.
4. Work began but, in April 2021, works were terminated on the site by the principal, Janco Developments Pty Ltd. More particularly, Janco terminated the contract with Heworth Construction and appointed a new builder. As a consequence, the subcontracts were also necessarily terminated. Mr Hadi said that the works being undertaken on site by Lidco were then only partially completed. Mr Hadi also said that no issue had been raised about defects in Lidco's work at the point when the job came to an end.
5. In August 2021, Lidco commenced the District Court proceedings to which I have already referred. In addition, on 30 August 2021, Heworth Construction served a final payment claim on Janco for some $7.5 million. On 13 September 2021, Janco disputed the validity of the payment claim due to an absence of reference date. Janco said that the payment claim contained false or misleading supportive statements. Janco alleged that the works were defective. Janco provided a monthly progress valuation report, which appears to be a quantity surveyor report, which noted "Balcony balustrade installation is progressing well." Also attached was a payment schedule which responded to each item in Heworth Construction's payment claim.
6. The work done by Lidco is described in Janco's payment schedule as Item 170 "Windows and Sliding Doors", in respect of which Janco suggested that an amount is owing by Heworth Construction. Why the amount is said to be owing is explained by the last column of the table, entitled "Reason(s) for withholding payment", which notes that only two-thirds of the work was completed prior to the termination date. Further, "The works which were completed were defective and require rectification. The rectifications are ongoing and Janco reserves the right to claim additional damages where applicable".
7. Similarly, in respect of Item 310, "Balcony Glass Balustrade", an amount of $250,000 is said to be owing to Janco, with the reasons including, "The works which was partly completed were defective and required to be rectified. The rectification works included removing the installed glass panelling, ordering new panels and reinstallation ... The rectifications are ongoing and Janco reserves the right to claim additional damages where applicable". It is this payment schedule which HWC Contracting relies upon in these proceedings as evidencing its offsetting claim.
8. On 29 November 2021, Heworth Construction issued a Notice of Backcharge to HWC claiming, "The failure by HWC to carry out its duties under the agreement with due skill, care and diligence has resulted in the claimed defects and caused a loss to Heworth in the amount of $400,000 + GST…" The notice attached Janco's payment schedule itemising the alleged defects.

Consideration

1. HWC Contracting submits that it has an offsetting claim against Lidco because it is apparent from the payment schedule served by Janco that there is a bona fide and genuine offsetting claim in respect of the costs of rectifying defective work performed by Lidco. There is no suggestion that the payment schedule is anything other than bona fide. What it demonstrates is that the client has identified and formed a rough assessment of the costs of rectifying the defective work. That is work which will ultimately be something for which HWC Contracting is responsible in one way or another and it looks to Lidco Corporation to pay damages under its subcontract with HWC Contracting in due course.
2. Lidco submitted that the service agreement between Heworth Construction and HWC Contracting is irrelevant; Heworth is not the plaintiff and was not a party to the contract with Lidco nor a party to these proceedings. The Notice of Backcharge had no contractual force under the service agreement: clause 6.0(d). Janco's payment schedule and the Service Agreement did not evidence an offsetting claim against Lidco. Janco's payment schedule and quantity surveyor report noted that the Balcony balustrade installation was "progressing well". The costs claimed by Janco from Heworth were "costs to complete" and did not include any allowance for defective work. Further, Janco's payment schedule indicated that Heworth had already been paid for all but $9,300.30 of the work done by Lidco. Whilst Janco's payment schedule referred to $250,000 for defective work, this amount was said to be hypothetical and had not been established to relate to any work undertaken by the defendant. HWC Contracting was said to have no arguable claim measurable in monetary terms for an amount equivalent to or exceeding the judgment debt amount.
3. Whilst HWC Contracting does not suggest that the Notice of Backcharge necessarily accords with, or has any particular contractual force, under the service agreement, it nonetheless indicates that Heworth Construction intends to exercise its rights vis a vis HWC Contracting in relation to defective works said to have been undertaken by Lidco, which it is suggested in the Notice of Backcharge contravened clause 6.0(a) of the service agreement. More importantly, Mr Fabrizio says that he intends to instruct HWC Contracting's solicitors to bring proceedings against Lidco to recover HWC Contracting's losses.
4. Having regards to the payment schedule prepared by a third party, Janco, together with evidence that Heworth intends to recover any loss related to Lidco's allegedly defective work from HWC Contracting, which intends to recover same from Lidco, I am satisfied that the offsetting claim is plausible and bona fide. It is not for this Court to determine whether that offsetting claim will succeed, but simply that it is genuine and I am so satisfied. On that basis, the statutory demand should be set aside. I decline however to make an order for indemnity costs as sought by HWC Contracting. This was a fairly standard application with a fairly standard result.
5. For these reasons, I make the following orders: 1. Order that the statutory demand issued by the defendant on 26 October 2021 be set aside pursuant to section 459H of the Corporations Act 2001 (Cth). 2. Order the defendant to pay the plaintiff's costs of the application.

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: 30 December 2021