BETWEEN : DIPLOMA CONSTRUCTION (WA) PTY LTD (ACN 113 950 100)

Corporations law - Application to set aside statutory demand - Offsetting claim greater than demand - Turns on own facts

1 MASTER SANDERSON: This is the plaintiff's application to set aside a statutory demand. A copy of the statutory demand appears as attachment KB1 to the affidavit of Kenneth Bishop sworn 20 December 2012 and filed in support of the application. In the schedule to the demand under the heading 'Description of the debt' there appears the following:

The GST inclusive amount of the unpaid balance of the SubContract Sum and approved variations less the agreed 5% retention under subcontract no. 1036/1478 between the Company and the creditor for works at 726 Hay Street Perth as set out in the creditor's Progress Claim No.3 a copy of which is attached and mark [sic] 'A'.

2 The amount of the demand is $113,807.24. In his affidavit Mr Bishop identifies the plaintiff as a building company. The defendant was contracted to design, supply, deliver and install secondary glazing and associated works for the defendant at 726 Hay Street, Perth. For this purpose the parties entered into a subcontract. A copy of that subcontract appears as attachment KB2 to Mr Bishop's affidavit.

3 On or about 18 September 2012 the defendant submitted Progress Claim No 3 for the period ending 20 September 2012 to the plaintiff.

4 The right to render progress claims and the way in which progress claims are treated is covered by cl 5.4 of sch 5 of the subcontract. Because of its importance I will quote this clause in full:

5.4 Progress Claims

(a) The Subcontract Sum is payable by way of progress payments in the manner set out in this clause.

(b) Progress claims must be submitted monthly by the Subcontractor by the date referred to in Item 17 and must be submitted with the completed and duly authorized Schedule 9 - Statutory Declaration.

(c) Progress claims must be made in writing and must fully detail all work carried out and itemize all adjustments claimed to the Subcontract Sum.

(d) Diploma may agree the value with the Subcontractor, or where no value is agreed, must assess the progress claim by reference to the value of the work completed on Site and the Subcontract Sum. Unless otherwise agreed by Diploma, no payment will be made for materials off site or unfixed materials on site.

(e) Diploma must provide the Subcontractor with written notice of either the value agreed or its assessment of the progress claim and any deductions or set offs, together with payment of such amount within the time referred to in Item 17. The notice must itemize all claimed adjustments to the Subcontract Sum and either the agreed value or the assessment of each. To the extent the value assessed by Diploma is lower than the progress claim, the progress claim is disputed.

(f) The assessment of any progress claim under clause 5.4(d) is provisional only and does not constitute approval of any work. Diploma may, if it reasonably considers the circumstances warrant it, adjust its assessment of any progress claim and issue a revised notice under clause 5.4(e).

(g) In consideration of the Supplier agreeing to make supplies to Diploma, and Diploma agreeing to receive such supplies from the Supplier/Subcontractor on or after 1st July 2000, the parties agree as follows:

• Diploma hereby elects to issue a recipient created tax invoice ('RCTI') in respect of any supply made by the Supplier to Diploma for the above project. Diploma may change this election by notice in writing. Until notice changing Diploma's election is given, Diploma will issue RCTI's for all supplies made to it by the Supplier.
• The Supplier/Subcontractor will not issue a tax invoice in respect of any supply of which Diploma has elected to issue an RCTI.
• The Supplier acknowledges that it is currently registered for GST and agrees to notify Diploma if it ceases to be registered.
• Diploma acknowledges that it is currently registered for GST and agrees to notify the Supplier if it ceases to be registered or if it ceases to satisfy any of the requirements of any determination of the Commissioner of Taxation in respect of RCTI's made under Section 2970(3) of A New Tax System (Goods and Services Tax) Act, 1999.
• Any expression used in this agreement which is defined A New Tax System (Goods and Services Tax) Act, 1999 has the same meaning as given in that Act.

(h) Where Bank Guarantees have been accepted as security they must:

1. be in a format approved by Diploma
2. be made payable to Diploma or a recipient as nominated by Diploma

(i) Diploma will not accept agreements with any 3rd party factoring companies.

5 Item 17 in the annexure to the subcontract, and referred to in cl 5.4(b), contains the following:

20th of each month. Payment 45 days from this date (subject to Clause 5.4(e)).

6 So the procedure is quite clear. The subcontractor, in this case the defendant, is entitled to render a progress claim. The progress claim must satisfy the requirements set out in cl 5.4(c). Once that is done the onus shifts to the plaintiff. Its obligations are found in cl 5.4(e). That is the mechanism pursuant to which a dispute arises as to the plaintiff's entitlement to make payment of a progress claim. In this case the notice anticipated by cl 5.4(e) was not given. Contractually no dispute arose. The plaintiff may have been dissatisfied with work undertaken by the defendant but absent any compliance with the requirements of cl 5.4 it cannot be said any genuine dispute arose.

7 Counsel for the plaintiff did make reference to cl 5.12 in sch 5 of the subcontract. That clause is in the following terms:

Diploma may withhold payment where there are reasonable grounds to suspect concealed work may be defective or where materials used or work methods employed may give rise to defects at a later date. Diploma may instruct for the works to be uncovered and the cost if [sic] this and remedial repairs shall be by the subcontractor.

8 This clause is clearly directed at work which is concealed and where defects may not be obvious. That was not the case here. Any defects were obvious and in my view it could not be reasonably argued cl 5.12 had any application.

9 Mr Bishop says in his affidavit on 27 September 2012 he sent to the defendant a letter outlining defects in respect of the works the subject of the progress claim and requesting immediate rectification of those works. It is not clear pursuant to what clause in the contract the request was made. Mr Bishop does refer to cl 4.18 which is headed 'Defects Liability' and is in the following terms:

(a) The Defects Liability Period commences on the Date of Practical Completion of the Works.

(b) Unless otherwise stated in this Subcontract, the Defects Liability Period expires on the expiration of the defects liability period under the Head Contract, as may be varied under the Head Contract, or if there are several defects liability periods under the Head Contract, on the expiration of the last of those defects liability periods.

(c) As soon as possible after the Date of Practical Completion of the Works, the Subcontractor must rectify any defect or omission in the Works existing and known to the Subcontractor at that date.

(d) At any time prior to the 21st day after the expiration of the Defects Liability Period, Diploma may direct the Subcontractor to rectify any omission or defect in the Works existing at or discovered following the Date of Practical Completion of the Works which becomes apparent prior to the expiration of the Defects Liability Period.

(e) The direction referred to in clause 4.18(d) must identify the omission or defect and state a date by which the Subcontractor must complete the work or rectification and may state a date by which the work of rectification must commence.

(f) If it is necessary for the Subcontractor to carry out work of rectification, the Subcontractor must do so at times and in a manner which causes as little inconvenience as is reasonably possible to the Head Contract Works and to the occupants and users of the Site and Head Contract Works.

(g) Any rectification work performed, or to be performed under clause 4.18 is subject to a further defects liability period of 12 months, commencing upon the date on which, in Diploma's opinion, the rectification work has been satisfactorily completed. The whole of the terms of clause 4.18, including subclause (g) apply to the rectification work and for this purpose a reference to Defects Liability Period will be treated as a reference to the further defects liability period.

10 This clause has application only after the 'Date of Practical Completion of the Works'. The subcontract defines that phrase in the following terms:

'Practical Completion of the Works' means that stage in the performance of the Works when:

(a) the Works are completed except for minor omissions and minor defects -

(i) which do not prevent the Works from being reasonably capable of being used for their intended purpose;

(ii) which Diploma determines that the Subcontractor has reasonable grounds for not promptly rectifying; and

(iii) rectification of which will not prejudice the convenient use of the Woks; and

(b) those tests which are required by this Subcontract to be carried out and passed before Practical Completion of the Works is reached have been carried out and passed; and

(c) documents and other information required under this Subcontract which, in the opinion of Diploma, are essential for the use, operation and maintenance of the Works have been supplied to Diploma.

11 There is nothing in Mr Bishop's affidavit which says anything about whether or not at the date the letter was issued by the plaintiff to the defendant practical completion had been achieved. In further support of this application the plaintiff relied upon an affidavit of John Martin Farrelly sworn 17 January 2013. At par 13 of that affidavit Mr Farrelly says the date of practical completion was 21 September 2012. He supports that contention by reference to a letter from Palassis Architects dated 21 September 2012 and appearing as attachment JF2. Mr Farrelly then goes on to say the rectification costs were $127,389.11 inclusive of GST. In other words the offsetting claim is greater than the amount in the statutory demand.

12 On behalf of the defendant it was submitted the affidavit of Mr Bishop founding the application did not quantify the amount of the rectification works and therefore the subsequent evidence of Mr Farrelly was inadmissible on what is generally referred to as the 'Graywinter principle': see Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund [1996] FCA 822; (1996) 70 FCR 452.

13 In my view that submission is without merit. It is the case that Mr Bishop's affidavit is cryptic. Mr Bishop does not specify how it is the plaintiff could have, on 27 September 2012, required rectification of the works. Further he does not specify the cost of the rectification works. But what is important is Mr Bishop does indicate there is an offsetting claim and he does indicate how in contractual terms that offsetting claim arises. The affidavit of Mr Farrelly fleshes out the claim. But Mr Farrelly is not raising a matter which is new and which was not flagged in the affidavit of Mr Bishop. It is permissible for Mr Farrelly to give evidence and quantify the offsetting claim.

14 Having reached that point it is only necessary to decide whether or not the offsetting claim is genuine. That is what is required by the terms of the legislation. There is also authority to suggest there is a requirement of good faith in determining the genuineness of an offsetting claim: see Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 [18] (Palmer J). Applying these criteria it is apparent the offsetting claim is genuine and made in good faith. It is unnecessary for me to examine the position in detail. Clearly the defendant does not accept the plaintiff is entitled to make any offsetting claim. But that is not the test. Any dispute between the parties on this issue must be resolved in a different forum.

15 The statutory demand should be set aside. There is an offsetting claim by the plaintiff equal to or greater than the amount of the statutory demand. Costs should follow the event and the defendant should pay the plaintiff's costs of the application including the reserve costs.