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

FACTS

1. Contractual relations between the parties were poorly documented. The precise identity and role of the central characters is unclear. Many features of the transaction were unconventional and perhaps unsavoury. At the time of these events, Mr Walker was the sole director of the following companies: 1. The Gosford Pty Ltd, which owns a site in Mann Street, Gosford on which a property development called "The Archibald" is underway, being a mixed use development consisting of a 27-level residential tower, a 28-level mixed use hotel and residential tower, commercial and retail tenancies, three levels of basement, podium carparking and associated external works, with a construction cost of some $185 million; and 2. Macarthur Projects, which (according to what Mr Walker told Mr Van Selm) is the development manager for The Gosford (although Mr Van Selm has never seen an agreement documenting this arrangement).
2. Peter Zhu (also known as Thomas Cardinal) is associated with two companies: 1. Shinetec (Australia) Pty Ltd, of which Chongjun Wang, Yongfeng Yuan and Michael Green were directors; and 2. NPH Group Pty Ltd, trading as "Macquarie Constructions Group", of which Mr Zhu was a director together with David Wallis. Mr Zhu's precise connection with Shinetec is unclear. I note from In the matter of Macarthur Projects Pty Ltd [2021] NSWSC 1563 that Mr Zhu is an undischarged bankrupt who should not have been a director at all: at [1]; sections 206A(2) and 206B(3), Corporations Act.
3. On 17 March 2020, a draft letter of intent was circulated between Mr Walker of Macarthur Projects, Mr Zhu of NPH Group/Shinetec and Mr Van Selm of Reform Projects. The letter of intent was to be issued by Reform Projects to Shinetec in respect of the design works for "The Archibald (Gosford) Project". According to the draft letter of intent, The Gosford, as Principal, intended to enter into a Design & Construct Contract with Shinetec, as Contractor, by 20 April 2020. In the meantime, "The Principal hereby authorises the Contractor … to perform certain preliminary work" described in Annexure A (Authorised Work). Annexure A listed four items of Authorised Work, being "Authorities and Stakeholder Approvals, management, documentation and submissions", Design and Documentation, Procurement and Early Works Contractor. Presumably, the letter of intent was never issued in final form.

Side Agreement

1. Meanwhile, on 18 March 2020, Mr Walker sent an email to Mr Zhu, with the subject "personal matter updated", setting out an agreement (the Side Agreement) as follows: Peter T Zhu (Thomas Cardinal) personally will give to Greg Walker and or nominee 1) A $5,000,000 services (introduction fee to new building entity owned by Shinetec) fee paid as follows: a) $1,000,000 upon signing of the letter of appointment pursuant to the construction contract by The Gosford Pty Ltd appointing Shinetec Pty Ltd as the head contractor for the project known as The Archibald - 108 Mann St Gosford NSW. This is anticipated to be on or about Thursday March 19 2020. b) The remaining $4,000,000 paid over the next 10 months in equal monthly instalments at the beginning of each month upon receipt of the said invoice. 2) Following this point b) as above (and for the same service) a $35,000 a month fee will be paid for 20 months after the $5,000,000 has been paid 3) A car of Gregs choice to the value of 650k (Title in the name of GW), financed by Peter and Peter to be paid out with clear title 11months after construction has started. Greg has shown peter his chosen car. 4) $100,000 loan to Greg when The Gosford accepts appointing Shinetec (taken place already) … to be paid back to … Peter from the first $400,000 payment as in point 1b. 5) A profit share of 5.5% in the NPH group Pty Ltd to Greg or his nominee for all construction jobs related to him. And 2.5% for all other work and profit. 6) NPH Group will work with Reform for The Gosford 7) NPH Group will employ Gregs Son ($75,000 p.a.) and pay for his Builders license course to assist in him getting his license if and when required
2. In Macarthur Projects, Black J observed of the Side Agreement, "The legal status of that arrangement is perhaps uncertain, so far as it involves a payment promised by Mr Cardinal to Mr Walker personally in respect of [The Gosford's] entry into a construction contract with Shinetec, apparently to induce the entry into that contract": at [6]. On its face, Mr Zhu agreed to give $5 million, a monthly fee of $35,000 and a car worth $650,000 to Mr Walker in order to secure the building contract for Shinetec. The email was printed and signed.
3. Mr Walker said the Side Agreement concerned money advanced to The Gosford - rather than himself personally - to pay costs associated with the development including council contributions, architect fees, supervisor costs, the costs of amending the development application, marketing, advertising and selling costs and interest. These costs were about $5 million over the first 18 months of the development; only the first $1 million was paid, which was expended on such costs.
4. Mr Walker's explanation may account for the initial $1 million payment referred to in clause 1(a) but it may not explain the acquisition of a car for Mr Walker for $650,000. It does also appear that, as between Mr Zhu and Mr Walker at least, there was an agreement that NPH Group "will work with Reform [Projects] for The Gosford".

Loan Offer

1. The next day, 19 March 2020, Shinetec issued a letter to Mr Walker of The Gosford entitled, "Conditions of Offer for The Archibald Project" (the Loan Offer), stating: In order to enter into a Building Contract with the Developer (The Gosford Pty Ltd), we, Shinetec make the following offer…
2. Amongst other things, Shinetec offered to provide builder finance for the first 20%, and potentially a further 10%, of the construction price, to be secured by a second mortgage ranking in priority behind the primary lender. In addition, on being appointed as Builder, Shinetec agree to provide The Gosford with $1 million "as contract bond for the Developer's cashflow". As I understand it, this $1 million was the funds referred to in Clause 1(a) of the Side Agreement. The offer was accepted by Mr Walker on behalf of The Gosford on 20 March 2020.

Superintendent Agreement

1. On 20 March 2020, Macarthur Projects and Reform Projects entered into a Superintendent Agreement. Reform Projects agreed to provide "the Services in accordance with this Agreement." Services were described in schedule B and included "Administration of Head Contract, including directions of associated Delays, Variation & Progress Claim". The capitalised words were not defined. It appears from the surrounding documents - and the parties appear to have understood - that the Head Contract was to be between The Gosford and Shinetec.
2. Clause 3 was entitled "Performance of the Services". Clause 3.4 provided: (emphasis added) If Reform becomes aware of any matter which may change or delay the performance of the Services it must within a reasonable time notify the Principal in writing of the delay. The written notice must include detailed particulars of the likely change or delay and recommendations to minimise any adverse effect from it. …
3. Clause 3.8 obliged Reform Projects to perform the Services with the degree of professional skill, care and diligence reasonably expected of a consultant experienced in providing the same or similar services. By clause 3.9, Reform Projects "represents that it has prepared the Deliverables with the degree of professional skill, care and diligence reasonably expected of a consultant experienced in providing the same or similar services." ("Deliverable" meant any deliverable to be handed over to the Principal as a component of the Services identified in schedule B: clause 1.) Clause 3.11(b) provided, "In performing the Services, Reform will … have regard to any relevant cost plan or budget for [The Archibald] provided by [Macarthur Projects]".
4. Clause 4 was entitled "Changes" and included: 4.2 Reform must comply with all reasonable instructions from the Principal. 4.3 If the Principal instructs Reform in writing to make a change or addition to the Services which is nevertheless of a character and extent contemplated by, and capable of being carried out under the provisions of the Agreement (Change), that Change will become part of the Services from the date of the written instruction directing the Change. … 4.5 If Reform has provided the Principal with written notice warning the Principal that a Change will have a detrimental effect on the Services, the warranties provided by Reform under the Agreement will no longer apply.
5. As such, Reform Projects had a contractual obligation to Macarthur Projects to administer the Head Contract between The Gosford and Shinetec, including giving direction on Shinetec's progress claims. Performance of this obligation was to be attended to with reasonable professional skill, care and diligence, having regard to any costs plan or budget provided by Macarthur Projects. The manner in which the Services were provided was subject to change, either as notified by Reform Projects or as instructed by Macarthur Projects.

Head Contract

1. On 30 June 2020, Mr Van Selm requested an executed copy of the Head Contract from Mr Zhu. In evidence is an undated Design and Construction Head Contract between The Gosford and Shinetec, executed by Shinetec. Under the Head Contract, Shinetec agreed to design and construct the Project for a Guaranteed Maximum Price (GMP) of $185 million. Australian Standard AS 4902-2000 general conditions of contract for design and construct was incorporated into the Head Contract. Clause 20 of the general conditions provided: The Principal [The Gosford] shall ensure that at all times there is a Superintendent, and that the Superintendent fulfills all aspects of the role and functions reasonably and in good faith … Reform Projects was identified as the Superintendent: Item 5, annexure to the Australian Standard General Conditions of Contract for Design and Construct.
2. Clause 37.1 of the general conditions provided that Shinetec was entitled to make a progress claim each month and, further: Each progress claim shall be given in writing to the Superintendent and shall include a subcontractor statement in the form of Schedule 2, a supporting statement in the form of Schedule 3 and details of the value of WUC done and may include details of other moneys then due to the Contractor pursuant to the provisions of the Contract.
3. As to how the Superintendent and Principal were to deal with progress claims, clause 37.2 of the general conditions provided: 37.2 Certificates The Superintendent shall, within 5 calendar days after receiving such a progress claim, issue to the Principal and the Contractor: (a) a progress certificate evidencing the Superintendent's opinion of the moneys due from the Principal to the Contractor pursuant to the progress claim, which separately identifies the Superintendent's assessment of amounts in the progress claim: (i) relating to the GMP and direct design or construction-related costs of variations (but not Contractor additional entitlements); and (ii) relating to Contractor additional entitlements, and reasons for any difference ('progress certificate'); and (b) a certificate evidencing the Superintendent's assessment of moneys due from the Contractor to the Principal pursuant to the Contract. … The Principal was then obliged to pay the amount of the Progress Certificate after setting off any amounts certified by the Superintendent as due from the Contractor as the Principal elected to set-off.
4. Reform Projects was not a party to the Head Contract. Nor was there any contract between The Gosford and Reform Projects. Nor, so far is known, was there any contract between The Gosford and Macarthur Projects. The Gosford had a contractual obligation to Shinetec to ensure that Reform Projects fulfilled its role reasonably and in good faith, where any breach of that obligation may expose The Gosford to a claim for damages from Shinetec. Reform Projects did not owe any contractual obligation to comply with Clause 37.2 of the Head Contract beyond what Reform Projects was obliged to do in order to perform its obligations under the Superintendent Agreement.

A sub-contract?

1. Precisely what happened after this becomes less clear. According to Mr Van Selm, Mr Walker said that NPH Group trading as "Macquarie Constructions" would be appointed as sub-contractor to Shinetec; the whole of the works under the Head Contract would be sub-contracted to NPH Group. However, Mr Van Selm has never seen a sub-contract.
2. According to instructions given by Mr Walker to a quantity surveyor - albeit after the parties were in dispute - whilst Shinetec was originally engaged as the "Head Contractor", the contract was novated to Macquarie Constructions Group Pty Ltd to undertake the development; a contract was entered into between The Gosford and Macquarie Constructions Group Pty Ltd, dated 26 May 2020, to design and construct the development: see [51]. As I understand it, however, Macquarie Constructions Group Pty Ltd was not incorporated until some time later, albeit Mr Zhu may have been the sole director of that company too: Macarthur Projects at [7].
3. Whether there was a sub-contract between Shinetec and NPH Group, or whether NPH Group (or another company) novated to Shinetec's position in the Head Contract, there was no contract between NPH Group and Reform Projects. Whatever the contractual relationships, or lack thereof, it will be seen from what follows that NPH Group submitted a series of progress claims to Reform Projects, which were reviewed and certified in consultation with Mr Walker, following with Shinetec submitted progress claims to Mr Walker which appeared to relate to, but not equate to, NPH Group's progress claims. As Reform Projects submitted, the fact that Shinetec made progress claims directly to Macarthur Projects after NPH Group had made progress claims suggests that there was no novation of Shinetec's contract, as suggested in the quantity surveyor's report.

Sub-contractor progress claims

1. On 21 July 2020, Reform Projects sent an email to Mr Wallis and Mr Zhu, arranging to meet in early August 2020 "to undertake a Progress Claim walk to assess your 'Draft' July 2020 Progress Claim." Reform Projects appears to have been proceeding on the basis that, as informed by Mr Walker, NPH Group was a sub-contractor to Shinetec. It is not known when the first progress claim was submitted or in what amount. The copy in evidence appears to be a later, amended version to which I will return.
2. On 18 September 2020, Mr Walker forwarded the Side Agreement and Loan Offer to Mr Van Selm, asking "Please keep confidential". According to Mr Van Selm, Mr Walker told him about the Side Agreement, saying: Zhu will bump the builder's claims up to factor in these payments so we can extract the money from Shinetec. Throughout the project you'll find that the builder's early claims will be very large, that is by design. Mr Walker also told Mr Van Selm about the Loan Offer, saying "[t]his … ties in with the cashflow arrangement that Zhu and I have agreed to in our personal side agreement …". Mr Walker denies this conversation. What was said, or not said, is not to be resolved on an application such as this. Either way, the Side Agreement and Loan Offer were provided to Reform Projects and the import of the documents was thereby conveyed.
3. On 21 September 2020, Progress Claim No 2, for August 2020, was emailed by Macquarie Constructions Group to Mr Walker and Mr Van Selm for certification. The progress claim was for $1,488,167.54 plus GST. The progress claim comprised a three-page payment schedule accompanied by a nine page progress claim breakdown. On 22 September 2020, Mr Van Selm sent an email to Mr Walker as follows: Within both of these claims, they have cumulatively claimed $982k in builders margin. They have all of their prelim costs covered in a separate line item. My suggestion would be that a discussion is held with Peter Z[hu] to make sure that you are the recipient of those funds. That way, you can clear the decks of your current project debts being: ● Reform circa $450k ● Hicksons circa $60k ● Prior Consultants (not sure what that number is) ● Macarthur Within the $37M of funding from Shinetec, I think the side agreement of the remaining $4M needs to be factored into the project costsing [sic], so each month they claim, you are covered. That to me in the smartest approach moving forward.
4. On 29 September 2020, Macquarie Constructions Group sent an email to Mr Van Selm attaching revised progress claims 1, 2 and 3 "in accordance with our discussion this morning." The amendments were described, including increasing the preliminary budget allowance but decreasing the builder's margin budget allowance; increasing the claim amounts of Preliminaries throughout each claim; claiming Preliminary "Admin", "Site Staff", "Temporary Services" and "Preliminary Allowances" at 4%; claiming Builders Margin at 4% and amending the schedules to note Builders Margin in lieu of Builders Overheads, "The Preliminaries and Builders Margin now equal to 18.75% of the total contract value."
5. On 30 September 2020, Mr Van Selm forwarded this material to Mr Walker, noting: (emphasis in original bolded and added in italics) As discussed and agreed yesterday, Reform Projects are hereby certifying these claims put forward by Macquarie Construction Group on behalf of The Gosford Pty Ltd. These claims will be certified in full on the basis of the below: 1. Greg Walker is to receive $1.2M from these three claims ($400k per claim) as per prior written agreements being in place 2. All of "The Gosford Pty Ltd" prior debts are to be paid off in full [including monies owed to Reform Projects]. 3. It is acknowledged by all parties that the prelims claim for these first three months is heavy. This claim approval is to assist the development with insurance payments, Consultant payments, Council bond's/deposits and front end prelim claims for hoarding works etc 4. Peter Zhu has confirmed that funds will be made available, with payments made accordingly within 10 business days of the claim assessment. Please acknowledge and confirm the above and I will assess the claims accordingly today.
6. Mr Walker replied 15 minutes later, "Thank you Carl. Noted. With thanks." Mr Van Selm then sent an email to NPH Group in essentially the same terms as that sent to Mr Walker, and copied to Mr Walker. On 1 October 2020, Mr Van Selm sent a further email to Mr Zhu, Mr Wallis and Mr Walker: As discussed and agreed between all four individuals today at [Macquarie Constructions Group's] Head Office, please see attached all 3 payment claims certified accordingly. As discussed and agreed, Macarthur Projects are to be paid $400k from each of the 3 claims, cumulating to a value of $1.2M. Greg will sort out all of his prior project debts from this monthly drawdown of $400k per month, which will continue on a monthly basis up until May 2021, cumulating in a payment of $4M over this period. It was confirmed today that the cumulative payment for all 3 attached claims should be forthcoming from Shinetec on or before 16 October 2020.
7. As certified, Payment Certificate No 1 was issued for July 2020 in the amount of $3,072,888.64 plus GST. Attached to the payment certificate was a three-page payment breakdown certifying that demolition was 45% complete and 25% of budgeted expenditure on consultants had been expended. Payment Certificate No 2 was issued for August 2020, certifying $1,767,044.51 plus GST. The accompanying payment breakdown certified that demolition was now complete. In addition, a further 11% of planned expenditure on consultants was certified. Payment Certificate No 3 for September 2020 certified $976,236.38 plus GST.
8. When reviewing the progress claims of NPH Group, Mr Van Selm said he considered all material provided to him by Mr Walker in relation to the project including the Head Contract, the Side Agreement, the Loan Offer and construction programs, plans and specifications. He verified line items relating to works done on site such as demolition and hydraulics by referring to his site observations and supporting materials such as trade invoices. He made enquiries in relation to line items that he could not assess by site observations, such as preliminaries, builders' margin and consultants, as he understood from Mr Walker that the amounts included in these line items had been pre-formulated and pre-agreed between Mr Walker and Mr Zhu. Mr Van Selm was not privy to the submission of NPH Group's claims to Shinetec or Shinetec's review of those claims and does not know if Shinetec actually paid NPH Group.
9. According to these contemporaneous documents, the progress claims were certified in consultation with Mr Walker of Macarthur Projects, having met with him and having obtained his agreement in writing. The Side Agreement and Loan Offer were part of what was considered; presumably that is why Mr Walker provided these documents to Mr Van Selm. As documented in these emails, the "preliminaries" component of NPH's progress claims was certified at this level - by agreement with Macarthur Projects - to release funds from Shinetec for the purpose of attending to the costs of the development, some of which appear to have been outstanding for some time. Some of these funds were to be paid to Mr Walker, in accordance with an agreement reached between, apparently, Mr Walker on the one hand and Mr Zhu on the other. Reform Projects did not certify the amounts until Mr Walker had agreed in writing, by email. Obviously, it may have been better for Reform Projects to refuse to certify these amounts at all, or least to the extent to which "the prelims claim … is heavy … to assist the development" to pay various upfront costs.
10. On 26 October 2020, Macquarie Constructions Group forwarded revised progress claims 1, 2, 3 and 4 for review and certification. On 27 October 2020, Mr Van Selm replied, copied to Mr Walker, attaching current payment certificates noting: (emphasis in original) As discussed and agreed, Macarthur Projects are to be allocated $400k per month per drawdown until such time as a capped $4M in revenue has been paid to them directly. From the above, Macarthur are to be paid $1,600,000 - $470,430.40 = $1,129,569.60 as an all inclusive cost for the four month drawdown allocation. As discussed, these claims are to be issued to Shinetec today, which have already been reviewed and vetted. Payment is due to all parties by no later than Friday 6 November 2020!! Moving forward, all claims must be fully supported by the claims checklist noted in the above payment certificates prior to me reviewing the claim. Reform Projects also pressed for payment of its outstanding fees.
11. The payment certificates attached to Mr Van Selm's email differed from those earlier provided on 1 October 2020. Payment Certificate No 1 was now lower at $2,871,880.63 plus GST. Payment Certificate No 2 was also lower at $1,407,404.61 plus GST. Payment Certificate No 3 was higher at $1,211,318.98 plus GST. Payment Certificate No 4, for October 2020, was certified in the amount of $643,850.11 plus GST.
12. On 17 November 2020, Mr Van Selm emailed Mr Zhu, copied to Mr Walker, pressing for payment of the progress claims advising, "As discussed today, we need a firm date in writing from Shinetec as to when payment for all 4 certified claims is to be made … Consultants, Contractors, Authority fee payments all need to be made, as well as the overall perception of this project to the market needs to be reinvigorated? We do not want this site having the stigma of "another white elephant" in Gosford. … There will be no further claims reviewed or certified until the 4 previously certified claims have been paid in full."

Head-contractor's first progress claim

1. On 4 December 2020, Niu Wei of Shinetec submitted Progress Claim 01 to Mr Walker of Macarthur Projects for certification and approval. The claim was for $2,902,932.20 plus GST. Shinetec advised that, "Once certified, we will forw[a]rd a copy of the tax invoice to The Gosford Pty Ltd."
2. The amount of the progress claim did not correspond with the Payment Certificate issued by Reform Projects for NPH Group's Progress Claim No 1. The accompanying 31-page schedule was also different to that submitted by NPH Group. A reconciliation between the progress claim and supporting schedule has not been undertaken by the parties. There is no obvious correlation between NPH's progress claim and Shinetec's progress claim, both being numerically and visually distinct.
3. Mr Walker emailed Mr Zhu and Mr Van Selm, "This doesn't appear correct?". Mr Van Selm replied, "We certified over $4M for their 4 cumulative claims. Not sure how/why this value is what it is, you guys will need to discuss between yourselves." Half an hour later, Mr Van Selm sent a further email to Mr Walker and Mr Zhu, attaching Shinetec's Progress Claim No 1 and asking, "Please sign, scan and return the PC01 statement letter so we can get money in the door!". An hour later, Mr Walker sent an email from Macarthur Projects to Shinetec, "I formally approve this claim. (Claim 01)".
4. Mr Van Selm said that he was not consulted in respect of Shinetec's progress claims as he did not prepare a payment schedule or payment certificate or otherwise provide an assessment to Mr Walker of those claims prior to Mr Walker approving the claim. The only opportunity he had to provide comments on the progress claims was when Mr Walker and he received copies of progress claims from NPH Group. Mr Walker expressed himself to be "shocked" by Mr Van Selm's evidence, saying that he relied on Reform Projects to properly perform its duties as Superintendent under the Head Contract.
5. It is clear from the contemporaneous documents that Shinetec's Progress Claim 01 was not the same as the progress claim submitted by NPH Group. Mr Walker noticed the discrepancy. Mr Van Selm refused to be drawn into sorting out the difference between what Reform Projects had certified - in consultation with Macarthur Projects as earlier described - and the figures proffered by Shinetec, stating, "Not sure how/why this value is what it is, you guys will need to discuss between yourselves." Whilst Mr Van Selm pressed Mr Walker to certify Shinetec's Progress Claim No 1, it was clear that Reform Projects had not analysed or certified Shinetec's progress claim and had expressly refrained from doing so. Mr Walker's approval of Shinetec's Progress Claim No 1 was unassisted by any work done by Reform Projects, beyond what Reform Projects had already done when reviewing NPG Group's progress claims.
6. On 7 December 2020, Mr Van Selm sent various text messages to Mr Walker, asking him to sign Shinetec's Progress Claim No 1, as opposed to approving it by email. From further text messages from Mr Walker, it appears that Shinetec and the existing financier, "Gemi", were negotiating a deed of priority in respect of finance provided by Shinetec. Mr Walker also advised, "From the $2.9 coming this week u must pay [Mr Zhu] at least 200 and me 200 we cannot survive past this week." Further text messages were exchanged between Mr Walker and Mr Van Selm on 19 December 2020, from which it is apparent that Reform Projects was anxious to be paid outstanding fees. Mr Walker advised, "I think we will get $300 this month. I will get $400 next claim which [Mr Zhu] wants to lodge Monday after this payment. So do you agree we share the $300 $150 each Monday and share the $400 $200 each claim 2. And claim 3 u balance is paid". Reform Projects insisted on receiving $200,000 from Progress Claim 1.
7. In evidence is a bank statement for Macquarie Constructions Group Pty Ltd, which has a deposit on 23 December 2020 of $1,663,244.78, with the description "NPH GROUP PTY LTD Sub Contractor Claim 1". It would appear that Progress Claim 1 was paid, either by The Gosford or from finance provided by Shinetec, secured over The Gosford's assets.
8. On 30 December 2020, NPH Group forwarded Progress Claim 2 to Mr Walker and Mr Van Selm for review and certification advising, "Please note that the attached claim does not include the $400K allowance for The Gosford Pty Ltd. This will be included in the final approved amount allocated by Shinetec." Mr Zhu sent a further email to Mr Walker explaining, "And this one we don't know how much Shinetec will cut off, so the when shinetec send you for approve that figure is what we will be paid (less retention and shinetec will keep their margin so we get is less)." Mr Walker replied, "I understand however I need to see what is paid from Macquarie to all the contractors and the breakdown of what was paid". Mr Zhu declined, "Sorry I can't give that info. This is very private and highly commercially confidential. (Just like I ask for you and your wife's personal bank statement.)"
9. On 31 December 2020, Mr Van Selm replied to NPH Group, copied to Mr Walker: … Not sure why you have changed some of the Head Contract values. Please revert back to what your original claim breakdown was initially as no budget transfers have been requested nor authorised. The assessment value is the same, however I am not changing your numbers again! Furthermore, I note that we are yet to receive all 6 MANDATORY pre-certificate checklist items from [Macquarie Constructions Group] as yet. Could you kindly advise when these will be forth-coming?
10. On 31 December 2020, Reform Projects issued Payment Certificate No 5, for December 2020, certifying $2,193,722.82 plus GST.

Head-contractor's second progress claim

1. On 21 January 2021, Shinetec submitted Progress Claim No 2 to Mr Walker of Macarthur Projects for approval. The claim was for $1,850,607.48 plus GST. Again, the amount was not identical to any progress claim previously submitted by NPH Group and certified by Reform Projects. The supporting documentation was also different. Later that day, Mr Walker replied, copied to Mr Van Selm, "Claim 2 is approved."
2. According to Macquarie Constructions Group Pty Ltd's bank statement, a deposit was made on 27 January 2021 of $1,257,000, with the description "NPH GROUP PTY LTD MCG Sub Contractor Sub Contractor". Again, it would appear that Progress Claim 2 was paid, either by The Gosford or from finance provided by Shinetec secured over The Gosford's assets.
3. On 28 January 2021, a series of text messages passed between Mr Walker and Mr Van Selm as follows: Walker: This is what I sent zhu. Do u want to continue with the email / offer or do you want me to deal with him directly. Very disappointed in your actions and treatment of me You know u needed me to sign off the claim. You agreed to pay me so I can pay others. You lied. On a slightly different note - having borrowed / paid $5 m in claims. How do we stand given only demolition has taken place - no site works since October. Two claims paid as per items listed. Van Selm: Yes $5.3M has been paid out. Last time I spoke with zhu he said either way get an independent QS in to status works and payments and it will all get resolved through the offer and buyout from either party Walker: Ok. I understand that. However I suppose I'm looking for leverage as to get some of the $400 he promised and the Gosford is promised each claim to pay marketing. CommissionsLawyers. Etc etc If I played hard it would not be good for nph group or Shinetec under the terms of the contract. The payment act etc correct ? Van Selm: No recourse under the payment act and they are theoretically self funding so not sure how strong your position is to be honest Walker: Even though the claim states certain contractors have been paid ? That have not ? Van Selm: They have not issued stat decs mate and you have signed off on the claims for payment Walker: I can only go on what I am told is the fact. I'm not a QS anyway happy to discuss with you tomorrow an[d] chi once I pay her Are u able to bring your lap top tomorrow. Do u have one Van Selm: Well niewei is effectively the QS for Shinetec he reviews what we assess then gets you to sign off. It seems a strange process given the first $37M is funded by Shinetec. Again I think best way is to status the works and costs paid out independently and wrap the variance up in the deal Walker: Ok
4. It is apparent from these emails and text messages that Mr Walker knew that the amount of work certified in the Progress Claims did not correspond with the work which had been done on the site. Rather, the progress claims were approved as a means of extracting funding from Shinetec, which was needed to pay development costs. Mr Walker also knew that the progress claims were made on the basis that contractors had been paid, when that was not necessarily the case.
5. Of course, one of the contractors who had not been paid was Reform Projects. Mr Van Selm had been agitating for some time in emails and text messages, some of which are extracted in this judgment, to be paid. On 31 January 2021, Reform Projects issued an invoice to Macarthur Projects for project management services completed under the Superintendent Agreement from May 2020 to January 2021, totalling $130,300 plus GST. Reform Projects served a payment claim under section 13 of the SOP Act on Macarthur Projects. Reform Projects referred the matter to adjudication. On 22 March 2021, a receiver and manager was appointed to The Gosford.

Quantity surveyor report

1. On 29 March 2021, a quantity surveyor prepared a progress assessment for The Archibald for Mr Walker of The Gosford and Shinetec. The report stated that it was prepared following instructions from The Gosford and assessed the contract works completed to date by Macquarie Constructions Group Pty Ltd (which may have been intended to be a reference to NPH Group trading as "Macquarie Constructions Group", albeit the emails indicate there was certainly also a Macquarie Constructions Group Pty Ltd at some point in time). The quantity surveyor attended the site with Mr Wallis and, on the basis of the quantity surveyor's observations and discussions with Mr Wallis, the quantity surveyor assessed that the completed works had a value of $1,761,838, excluding GST.
2. According to the quantity surveyor's report, whilst Shinetec had submitted two progress claims which had been approved totalling $5,096,655.02, which "have been approved and paid by the Superintendent Reform Projects", the quantity surveyor had not sighted documentation that it was common practice to submit with a progress claim including evidence of insurance, quantity surveyor's assessments, consultants' certificates, statutory declarations by the head contractor confirming that all sub-contractors had been paid, statutory declarations by the sub-contractors confirming payment by the head contractor, construction programs, construction certificates and development approvals.
3. The quantity surveyor considered that there were significant variances between the quantity surveyor's assessment of the works completed and those of "Macquarie Constructions Group Pty Ltd", which the quantity surveyor considered had made significant overclaims in respect of the value of works completed. In particular, "MCG" had claimed preliminary items which the quantity surveyor believed were not justified or required evidence of payment. The amount of consultants' fees claimed was not reflected in the level of design undertaken and consultants still to be appointed, and where the quantity surveyor was informed that $450,000 of consultants' invoices remained outstanding.
4. According to the contemporaneous documents, none of this would have come as a surprise to Mr Walker, who was already aware that the progress claims were prepared and certified, at least in part, to extract funding from Shinetec and did not reflect work done. Further, Mr Walker was also aware that, whilst Reform Projects had been involved in certifying the progress claims by NPH Group, Reform Projects had no involvement in certifying Shinetec's progress claims save for pressing Mr Walker to do so.

Common Law proceedings

1. On 12 April 2021, an adjudicator issued a determination. In accordance with section 25 of the SOP Act, the adjudication certificate was registered as a judgment in the District Court on 14 April 2021. On or about 22 April 2021, Reform Projects issued a statutory demand on Macarthur Projects.
2. On 11 May 2021, Macarthur Projects filed an originating process seeking to set aside the statutory demand. Macarthur Projects and The Gosford also filed a statement of claim in the Common Law Division of this Court against Reform Projects. It is there pleaded that Macarthur Projects and Reform Projects entered into the Superintendent Agreement. Reform Projects is said to have been aware that Macarthur Projects was acting as agent of The Gosford in entering into the Superintendent Agreement. The Services which Reform Projects was obliged to provide under the Superintendent Agreement included administration of the Head Contract.
3. Further, it was the contractual obligation of the Superintendent to ensure that Shinetec's progress payment claims were verified and certified before being authorised for payment. Reform Projects approved progress payment claims in the amount of $5,096,655.02 and "paid the progress payment to its sub-contractor builder", presumably a reference to NPH Group or perhaps Macquarie Constructions Group Pty Ltd.
4. The Gosford is then said to have terminated the Head Contract for breach, "including failing to properly certify the progress claims in accordance with the [Head] Contract." This pleading does not make sense and may either be a reference to clause 37.1 of the Head Contract or an error. Further: Despite [Reform Projects] authorising payments in the amount of $5,096,655.02 on the basis that the amount claimed represented the [works] done by the Builder, only building works to the value of $1,761,383.00 had in fact been done on the site. In authorising the over payments, and failing to comply with its obligations under the Building Contract and the Contract, the Defendant has breached the Contract.
5. Finally, Macarthur Projects and The Gosford are said to have suffered loss and damage in the amount of $3,334,817 as a result of Reform Projects' breach of contract.

SUBMISSIONS

1. Macquarie Projects' learned senior counsel, Mr Pesman SC, sensibly jettisoned the plaintiff's written submissions earlier filed and was able to assist the Court by oral submissions. Macarthur Projects submitted that the suggested offsetting claim was genuine, noting that the quantity surveyor's report was obtained before the judgment debt and statutory demand and only a month after Reform Projects' invoice which was the subject of the adjudication. (I do note, however, that the quantity surveyor's report was obtained after repeated demands by Reform Projects for payment, following which Reform Projects had embarked upon the adjudication process.)
2. It was said that there was a plausible contention that Reform Projects' contractual obligations prevailed notwithstanding the content of other contemporaneous documents. The Side Agreement created an obligation on Mr Zhu, said to be a principal of Shinetec (although I am not sure about this), to make certain payments to Mr Walker which would otherwise be payable to Shinetec. The Side Agreement was not inconsistent with the Superintendent Agreement. The Side Agreement did not affect the obligations as between Macarthur Projects and Reform Projects nor entitle Reform Projects to abrogate its responsibility to assess whether or not the work the subject of the project claims had in fact been done. Whilst the correspondence recorded that there was money available from the progress claims for Mr Walker to be paid by Shinetec, that did not affect Reform Projects' obligation to properly certify the progress claims. The correspondence did not establish acquiescence in the over-certification for the purpose of paying Mr Walker (I am not sure about this either). If the process of approving progress claims was a device to distribute money, and everyone knew it, it might have expected that Mr Van Selm would say so in his affidavit but, instead, he described the process of certifying claims, which suggested that the process was a legitimate one called for by the contract. (That is partially correct; Mr Van Selm did also say that line items which he could not assess from site observations were pre-formulated and pre-agreed between Mr Walker and Mr Zhu).
3. Mr Van Selm's emails were said to indicate that the progress claims were properly payable, not that he understood that the progress claims were being inflated in order to provide funds to Mr Walker. What Mr Van Selm indicated was that, as a result of the certification, Mr Walker would be able to be paid. This was quite different from saying that the progress claim had been certified for that purpose. The emails did not confirm that the progress claims were certified, whether or not the work had been done. Not only was such a construction of the emails plausible, it was preferable.
4. Reform Projects was said to owe contractual obligations to The Gosford and Macarthur Projects, independent of any arrangement between Mr Walker and Mr Zhu. Mr Van Selm did not suggest that this was a "solemn farce" by which Reform Projects had no responsibility to assess whether or not the work had in fact been done. In short, there was a plausible contention that Reform Projects had an obligation to certify whether or not the work was done. Reform Projects certified the work in circumstances where the quantity surveyor says the actual work done was a third of the amount certified. It was said to be a serious finding to conclude that everyone was aware that the works had not been done and the certification did not bear any clear connection with what had been done on the site.
5. Reform Projects submitted that it was apparent from the contemporaneous emails that Mr Zhu and Mr Walker were the driving forces in the project and reached an agreement as to how and what was to be paid and when. Further, the contemporaneous correspondence established that Mr Walker approved the payments to Shinetec of $5,228,893.65, there being no evidence that Reform Projects approved Shinetec's payment claims. Nor did the amounts claimed by Shinetec match NPH Group's progress claims; thus, it could not be suggested that the claims were back-to-back such that NPH Group's progress claims were certified at the sub-contract stage and reflected in certifications 'upstream'. The fact that Mr Walker chose to promptly approve Shinetec's progress claims, rather than to allow the Superintendent to make a formal certification through a progress certificate and to approve the claim, means that Macarthur Projects cannot have a genuine offsetting claim.
6. Reform Projects submitted that, whilst Macarthur Projects relied on a report from a quantity surveyor to support its contention that the value of the progress payments to Shinetec did not accord with the value of the building work, the Superintendent Agreement did not prescribe how the payments to the builder were to be assessed; it simply required that the defendant have regard to any relevant cost plan or budget for the project provided by the plaintiff. Reform Projects complied with that obligation. The most significant difference in the assessments of the quantity surveyor and Reform Projects was approximately $1.5 million relating to preliminaries, which was explained by the contemporaneous correspondence between the parties. Given that the report does not, on its face, consider any payments required to be made under the Side Agreement, the Court would not be satisfied that its valuation was made in accordance with any relevant cost plan or budget for the development provided by Macarthur Projects. (I do not consider that the Side Agreement can be considered a cost plan or budget, but rather a private agreement between Mr Walker and Mr Zhu, which Mr Walker wished (probably for good reason) to remain confidential).
7. Reform Projects also submitted that the Common Law proceedings were liable to be struck out where rule 14.9 of the Uniform Civil Procedure Rules 2005 (NSW) required that for any document referred to in a pleading, the effect of the document must, so far as material, be stated: TCS ACES Pty Ltd v Mikohn Gaming Australasia Pty Ltd [2007] NSWSC 1139 per Brereton J at [7]; Hill End Gold Ltd v First Tiffany Resource Corporation [2008] NSWSC 1412 per Brereton J at [10]. Reform Projects also submitted that the Statement of Claim was signed by the plaintiff's solicitor but did not include a statement required by clause 4(2) of Schedule 2 to the Legal Profession Uniform Law Application Act 2014 (NSW) to the effect that there are reasonable grounds for believing on the basis of provable facts and a reasonably arguable view of the law that the claim has reasonable prospects of success. The defendant's solicitors had invited the plaintiff to correct this issue but to date, no response had been received. As such, it was submitted that the statement of claim is also liable to be struck out on this basis: Groth v Audet (2006) 65 NSWLR 388; [2006] NSWCA 48 at [33]-[34] per Tobias JA, with whom Mason P and Basten JA agreed.

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 an adjudication certificate under the SOP Act, the company served with a statutory demand cannot claim it has a genuine dispute under section 459H(1)(a) of the Corporations 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 SOP Act 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 SOP Act 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. Drawing on my judgment in In the matter of Fujian Xingxing Restaurant Pty Ltd [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." See also the recent judgment in In the matter of Macarthur Projects Pty Ltd [2021] NSWSC 1563 at [9]-[12] per Black J, albeit concerning whether there is a genuine dispute about the existence of a debt.
3. 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.
4. 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".
5. 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. …
6. 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).
7. See also Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (2019) 99 NSWLR 397; [2019] NSWCA 60 at [62]-[65] per Bell P (Sackville AJA agreeing). A statutory demand should not be permitted to stand where the issues are genuinely in dispute, depriving Macarthur Projects of an opportunity to pursue those claims on the merits: Macarthur Projects at [14].

CONSIDERATION

1. A messy commercial dealing such as this is unlikely to be a suitable candidate for a statutory demand. At the blurry edges of these arrangements must surely lurk an offsetting claim which clears the low hurdle described in the authorities. It can, I think, be said that, whatever the demands made by Mr Walker or Mr Zhu, the Superintendent was charged with a contractual obligation to give directions on Shinetec's progress claims, exercising reasonable care, skill and diligence. In this case, that may have resulted in the Superintendent refusing to certify an inflated progress claim by NPH Group, or certifying the correct amount only. It may be that Reform Projects could argue in defence of such an offsetting claim that, in the circumstances described, it had notified a change in how the Services were to be provided under the Superintendent Agreement (clause 3.4), or Macarthur Project had given instructions with which it complied (clause 4). Whether the offsetting claim is genuine as opposed to mere bluster has given me pause for thought, but the contention that Macarthur Projects was entitled to expect that the contractual obligations in the Superintendent Agreement were performed according to its terms notwithstanding the instructions of its perhaps errant director is not fanciful. Further, Reform Projects declined to review Shinetec's progress claims at all, which may have been a breach of its contractual obligations.
2. But that is not the end of the matter. As mentioned, it is not only necessary to establish a sufficiently arguable claim as to liability but also as to quantum. As Brereton J explained in Douglas Aerospace at [40]: However, the quantification of that offsetting claim is another matter. While the full amount of an offsetting claim is to be deducted from the admitted total to ascertain the substantiated amount [Classic Ceramic Importers Pty Ltd v Ceramica Antiga SA (1994) 13 ACSR 263], that applies only to the extent that the offsetting claim is genuine. Thus a company relying on an offsetting claim must adduce evidence that enables the court to ascertain the amount of the genuine claim to the extent necessary to apply the formula in s 459H. If the offsetting claim must plainly exceed the amount of the demand, it is unnecessary that it be precisely quantified. But where that is not clear, the court must be able to quantify an offsetting claim, and if the evidence does not permit it to do so, will attribute to it only a nominal value [Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 1) (1994) 13 ACSR 455]. See more recently In the matter of Savemore Wholesale Pty Ltd [2021] NSWSC 307 at [37] per Black J.
3. In his affidavit sworn in support of the application to set aside the statutory demand, Mr Walker deposed that Reform Projects had breached the contract by approving progress payments without properly certifying and ensuring that the works were in fact done. Macarthur Projects' offsetting claim is said to comprise the fees paid to Reform Projects to date, the fees claimed in the statutory demand and the amount of $3,334,817 said to have been wrongly authorised to be overpaid. As to the second component - the fees claimed in the statutory demand - it is not clear how this component is said to be an offsetting claim as opposed to a dispute as to the underlying debt, contrary to principles explained in J Group Constructions, Vista Del Mare and Douglas Aerospace. This component can be put to one side.
4. Turning to the first component - the fees paid to Reform Projects to date - there is no evidence of what fees were paid. The fees the subject of the SOP Act progress claim were from May 2020 to January 2021 and comprised $146,630 (forming the basis of the statutory demand). Any fees rendered from entry into the Superintendent Agreement in March 2020 until the end of April 2020 are unlikely to have eclipsed the amount in the statutory demand. Nor is it said whether all of these fees should be repaid given a total failure of consideration or on what other basis the fees should be repaid. If only a portion of the fees should be repaid, being the difference between the value of the work performed and the work done, there is no suggestion as to what that difference may be nor why. I am at a loss.
5. Turning to the third component - $3,334,817 said to have been wrongly authorised to be overpaid - in the Common Law proceedings, Macarthur Projects and The Gosford are said to have suffered loss and damage in the amount of $3,334,817 as a result of Reform Projects' breach of contract. It being a contractual claim, and there being no contract between The Gosford and Reform Projects, that is the end of The Gosford's part of the claim, so far as it was ever relevant to this application. Turning to Macarthur Projects' claim against Reform Projects, and assuming for the moment that Reform Projects breached the Superintendent Agreement, the statement of claim provides no clue as to how it is said that Macarthur Projects (as opposed to The Gosford) suffered any loss, in particular, how the difference between the Shinetec progress claims as certified and the work actually done is a measure of the loss suffered by Macarthur Projects and recoverable against Reform Projects. Whilst I can see how The Gosford may have suffered loss, assuming that Shinetec funded Progress Claim 1 and Progress Claim 2 and impaired The Gosford's assets with its security, what loss did Macarthur Projects suffer which may form the basis of an offsetting claim? 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.
6. Here, I am not satisfied that any offsetting claim which Macarthur Projects may have against Reform Projects has more than nominal value such that the statutory demand should stand.

ORDERS

1. For these reasons, I make the following orders: 1. Dismiss the Originating Process filed on 11 May 2021. 2. Order the plaintiff to pay the defendant's costs of the proceedings.

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: 29 December 2021