Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd

Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd - [2018] NSWSC 1647 - NSWSC 2018 case summary — Zoe

[4]

Liquidated damages

The first offsetting claim put forward on behalf of Grandview is for liquidated damages for delay in completing the works under cl 30(a)(i). The rate prescribed for the purpose of that clause (Item 15(a)) was $4,000 plus GST per day.
In support of the first offsetting claim, Mr Zhang's affidavit stated: Pursuant to clause 30 and item 15 of the agreement, Budget is liable to Grandview for liquidated damages of $4,000.00 plus GST per day in respect of each milestone completion date which Budget has failed to meet, such damages being separate and distinct from each other and not cumulative.
Mr Zhang's affidavit did not contain any quantification of this claim. Mr Brincat calculated the sum due as $330,000, based on 75 days at $4,400 per day. Mr Brincat stated that on his instructions, Budget "illegally walked off the site" between 7 September and 16 October, which was 25 working days. The other 50 days in Mr Brincat's calculation came from his estimate that 50 working days would be required for completion of the works.
Budget disputes this claim. Budget denies that it was responsible or at least wholly responsible, for the delay after 12 December. Budget also points to the fact that Grandview notified Budget on 22 December that the site was to be closed and ordered Budget to leave the site after 4 January. As I have also recounted, Budget suspended the works on 31 January.
Having regard to the terms of the sub-contract, it seems to me that Mr Brincat's calculation is misconceived. Clause 30(a)(i) is concerned with delay in completion of the works beyond the scheduled date of practical completion. For the purpose of the clause, delays prior to that date do not matter. The damages are calculated per day of delay after the date of practical completion specified in the sub-contract.
Counsel for Budget submitted for the purpose of calculation, only working days were included. But I think this is potentially contestable. Ultimately it depends on the interpretation of the contract. Counsel was unable to point to any provision of the contract which would expressly limit the phrase "per day" in Item 15(a) to dates specified in the contract to working dates.
I accept that, in principle, Grandview cannot be entitled to liquidated damages for any period of time when it had excluded Budget from the site. Grandview had an obligation under the sub-contract to afford access to Budget to allow it to carry out the works the subject of the sub-contract: cl 19(a) and (b). The law does not permit Grandview to recover damages from Budget for a failure to complete the work if that is a consequence of Grandview's own failure to allow access: Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd (2017) 95 NSWLR 82; [2017] NSWCA 151 at [114]-[116].
In my view, no liquidated damages for delay can be recovered for the period after 31 January when Budget, in accordance with its statutory rights, suspended work. Budget has a strong case that its liability to pay damages ceased before 31 January, based on the steps actively taken by Grandview to exclude it from the site on 4 January. But Budget's contention for the period prior to 31 January is at least potentially contestable. The principle that a party is not entitled to take advantage of its own wrong involves, or at least may involve, a question of causation. It may be that in order to take advantage of the principle, Budget must affirmatively demonstrate that, had it not been denied access, it would have undertaken the works during the relevant period. That may well be so, but it is a factual matter and for all the Court knows there may have been some other impediment to Budget undertaking work during the period, or at least the whole of the period, from 22 December onwards.
In deciding whether there is an offsetting claim, the Court is concerned only with whether the claim made is genuine and sustainable. If it is, then the strength of the claim, and the likelihood of it being sustained at a hearing, is immaterial. In my view, Grandview has a potentially viable claim for $4,400 in delay damages per calendar day from 13 December to 31 January inclusive. There is no viable claim after that date. The relevant period is 50 calendar days and, accordingly, Grandview has established that it has an offsetting claim in the sum of $220,000 for the purposes of the Corporations Act, s 459H(1)(b).

[6]

Cost to complete works

Mr Zhang's affidavit stated: Budget's failure to complete the work in accordance with the program has left Grandview with no option but to exercise its rights under the agreement to terminate the agreement and engage another contractor to finish the works. This is likely to cause Grandview to incur additional costs which will be claimed against Budget.
In referring to termination, Mr Zhang was referring to something which would, or at least might, happen in the future. Grandview had taken no steps to terminate the sub-contract by the time the statutory demand was issued on 31 January and had still taken no steps to terminate the contract when the application to set the statutory demand aside was made on 20 February. The contract provided for a "show cause" procedure, and this was purportedly invoked by Grandview in March. Grandview did not purportedly terminate the contract until 9 April.
Counsel for Budget submitted that there were two short answers to this claim. First, counsel pointed out that the claim did not arise, in the sense that Grandview's cause of action did not accrue, until the contract was terminated. Counsel argued that only an offsetting claim in existence at the time of the statutory demand (or, perhaps, at the time the application to set aside the statutory demand was made) could be taken into account. Second, counsel relied on the fact that Mr Zhang's affidavit contained no details of the amount of the alleged offsetting claim; those details were only provided later in the report by Mr Brincat. Counsel argued that, on the Graywinter principle, the alleged offsetting claim was unsustainable.
In many cases, a claim which arises after the application to set aside the statutory demand has been made, will not have been referred to in the supporting affidavit and the Graywinter principle will, in practice, prevent it from being raised. But in the present case, the claim was foreshadowed in the affidavit, so the validity of counsel's first point arises directly.
At first sight, there seems something to be said for counsel's contention. The procedure for issuing and challenging a statutory demand is designed to be a summary one, with strict time limits. It seems strange to think a company facing a demand for an undisputed debt claim could avoid the presumption of insolvency by asserting that in future it expected to have an offsetting claim, and being fortunate enough for the claim to accrue before the hearing of its set-aside application. This application, which was heard more than eight months after the application was first made, as a result of the extensive evidentiary material put forward by the parties, is a stark illustration of what that could mean in practice.
In Biron Capital Ltd v Velowing Pty Ltd [2003] NSWSC 1181 the plaintiff served a statutory demand which was not set aside or complied with. The statutory demand was based on a guarantee given by the defendant for the liabilities of a borrower under a loan agreement with the plaintiff. The borrower also gave security to the plaintiff by way of fixed and floating charge. After the statutory demand was issued to the defendant, the plaintiff appointed a receiver to the borrower's assets. The receiver sold land owned by the borrower. The defendant guarantor alleged that the sale was at an undervalue and wished to rely upon this contention in defending the winding up proceedings.
The defendant applied pursuant to s 459S for leave to oppose the winding up application on the ground of its claim against the plaintiff (through the receiver) that the property had been sold at an undervalue.
Barrett J (as his Honour then was) refused the application on the ground that it was not necessary. The defendant's claim concerning the sale had arisen after the twenty-one day period within which any set-aside application had to be made. His Honour concluded that, the claim not having arisen, it could not have been relied upon in making an application under s 459G: see at [9]-[10]. His Honour said that a ground under s 459S was one that was "actually available to be asserted according to facts and circumstances existing at the time when it was open to the company to resort to the s 459G procedure". His Honour considered that this conclusion followed from the statutory scheme whereby disputed debts, offsetting claims and defects and demands are "meant to be resolved in a conclusive way in advance of the court's considering whether a winding up order on the grounds of insolvency should be made".
Counsel's second submission was based on the decision of Black J in Re Infratel Networks Pty Ltd [2012] NSWSC 943. In that case the set-aside application was dismissed because the supporting affidavit filed with the application did not state that the quantum of the offsetting claim exceeded the debt, nor did it allow any assessment of the magnitude of the offsetting claim to be undertaken. His Honour relied on earlier first instance decisions in Broke Hills Estate Pty Ltd v Oakvale Wines Pty Ltd (2005) 23 ACLC 1,266; [2005] NSWSC 638 (Gzell J); Kerslake Superannuation Pty Ltd v C and L Building Pty Ltd (2010) 4 BFRA 668; [2010] NSWSC 424 (Barrett J) and 185L6 Pty Ltd v Strata Corporation 07176 Inc [2011] SASC 164 (Blue J).
In his post-hearing submissions, counsel for Grandview raised authority which casts doubt on both of the contentions made by counsel for Budget.
In Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 3) (2014) 46 WAR 483; [2014] WASCA 132, a building contractor issued a statutory demand for the amount of a progress claim which had not been disputed. The principal applied to set aside the demand on the ground of an offsetting claim for the cost of rectifying allegedly defective work. The allegation had been raised shortly before the issue of the progress claim in question. The owner did not contest the progress claim and the builder issued a statutory demand. The owner moved to set the demand aside. In a supporting affidavit, the claim was asserted on the owner's behalf and it was said that the costs were being collated, but no figure was put forward. But the claim was quantified in subsequent evidence and exceeded the amount of the debt in the statutory demand. At first instance, the statutory demand was set aside on the basis of the offsetting claim.
The Western Australian Court of Appeal dismissed the builder's appeal. In doing so, the court held that the supporting affidavit under s 459G was not required to specify the quantum of the offsetting claim, or even contain evidence from which the amount of the offsetting claim could be calculated. The Court said that to the extent that Infratel, Broke Hills, Kerslake and 185L6 suggested to the contrary, they were incorrect and should not be followed. There is thus intermediate appellate authority which appears to be against the second point made by counsel for Budget.
Furthermore, in Pravenkav, the Court referred to the earlier decision of the Full Court of the Federal Court in Equuscorp Pty Ltd v Perpetual Trustees WA Ltd (1997) 25 ACSR 675; [1997] FCA 1366 (also reported, but not fully, in (1997) 80 FCR 296). The case involved a financing scheme under which Perpetual was trustee for investors in the scheme. Most of the investors financed their investments under loan agreement from Equuscorp. Equuscorp gave a letter of credit to Perpetual to secure the returns promised to the investors. Perpetual issued a statutory demand for amounts claimed under the letter of credit. The loan agreements contained a provision (clause 17) for monies deposited with Equuscorp on account of the borrowers. Equuscorp contended (and the trial judge found) that the clause in the loan agreement gave rise to claims which could be offset against the amount under the statutory demand and reduced the amount accordingly.
On appeal, Perpetual challenged that view. The trust deed required Perpetual to pool income payable to the investors and, after payment out of costs and expenses of various parties, to distribute them to the investors. The distributions were to be made within 30 days. The point taken by Perpetual was that as at the date that the letter of credit matured, the 30 day period had not expired.
The Full Court said (at 697): Subject to variation of the arrangements, as at the time of the statutory demand it appears that no off-setting entitlement had arisen under cl 17 of the loan agreements. But as his Honour said in his judgment at 19-20: The amount of the offsetting claim, including accrued interest, has to be considered as at the time the Court is determining the application under s 459(G). This follows from the ordinary language of the statute and the use of the present tense. Section 459H(1) speaks of the Court being satisfied that there is a genuine dispute between the company and the creditor. Similarly the definition of "offsetting claim" refers to a genuine claim that the company has against the creditor. Moreover s 459H(4) assumes that the Court may vary the amount in the demand, which necessarily contemplates that the Court may take into account variations in the debt which have occurred since the service of the demand, for example by payment on account. His Honour's view is in accord with the ordinary English construction of the relevant provisions of s 459H. The proposition that the trustee has thirty days in which to distribute fees after their receipt from the relevant owner has no effect upon the outcome in this case.
The Full Court continued by pointing out that in any event there was a genuine argument available to Equuscorp that it was entitled to insist on payment by way of exchange of cheques, with the cheque from Perpetual incorporating the pooled amounts. In effect this would have given Equuscorp an arguable entitlement to a set-off.
In Pravenkav, the Court of Appeal cited the decision in Equuscorp in support of the proposition that the amount of the offsetting claim for the purposes of s 459H was to be decided at the date of the hearing of the set-aside application and not at some earlier time. But on the facts in Pravenkav, it was not necessary to decide whether a claim had to be in existence at the date of statutory demand. The issue in Pravenkav was whether a claim, admittedly in existence, needed to be supported by evidence of the quantum.
Counsel for Budget submitted that the Full Court in Equuscorp "did not clearly say anything more than the quantum could be finally determined at a time after the initial twenty-one day period". Counsel also suggested that the fact that Equuscorp had a "genuine argument" that it was entitled to insist on payment by way of exchange of cheques meant that the Full Court's statement, quoted above, about relying on a claim which had not yet accrued was obiter.
Counsel for Budget also pointed to authority stating in general terms that a cross demand must be "real and not spurious, hypothetical, illusory or misconceived" (Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation (2006) 94 SASR 269; [2006] SASC 91 at [47]). Counsel submitted that until the cause of action had accrued it was "hypothetical" in this sense. Finally, counsel referred to an earlier statement by a different Full Court of the Federal Court in John Shearer Ltd & Arrowcrest Group Pty Ltd v Gehl Company (1995) 60 FCR 136; [1995] FCA 1034 (at 143) that a cross-demand for the purpose of s 459H(1)(b): …will include any claim for damages which exists at the time the application to set aside the statutory demand is made…
It is not necessary in the present case to decide the question posed by counsel's submission. I do not think that Grandview has an available claim in any event.
Mr Zhang's affidavit did not contain any calculation of the amount claimed under this head. In Mr Brincat's report which was dated 28 April, he assessed the cost of work to be completed at approximately $1.1 million.
Counsel for Budget attacked this figure. He submitted that it contained, on its face, arithmetical errors resulting from Mr Brincat having multiplied where he should have divided and the like. Counsel contended that, even accepting everything else Mr Brincat said, the figure was only approximately $425,000. Budget's expert, Mr Sanig, assessed the cost of completing the work at approximately $260,000. But in my view there is a more fundamental objection.
Grandview's entitlement under the contract was to have the contract works completed by Budget at the agreed contractual price. The cost to completion as it now stands, having regard to the work done by Grandview, is not an item which of itself can be claimed under the contract. It is only one of the integers in the calculation of Grandview's loss of bargain damages.
If Grandview has validly terminated the contract, it will be entitled to damages which would put it in the position in which it would be had the contract been completed in accordance with its terms. The first integer in this calculation will be the amount required to complete the works to the contractual standard. But it is necessary to take account of what Grandview would have had to pay under the subcontract. Using Mr Brincat's figures, one adds the cost of completion of the works ($1.1 million) to the amount already paid ($1.2 million). But to complete the process, it is necessary to subtract the contract price. This is given by Mr Brincat, including variations assessed, as $2.5 million. On these figures, the figure for loss of bargain damages is negative and nothing is recoverable.
This is consistent with common sense. The amount claimed by Budget is of the same order in magnitude as the amount assessed by Mr Brincat to complete the works. If Grandview paid the amounts demanded, it would be open to it to make a "true" restitution claim for defective work. If Grandview does not pay, then it cannot, consistently with the SOP Act, make an offsetting claim for that work. To conclude otherwise would be to allow Grandview to evade the decision in Douglas and the decision in Diploma on which it was based. This alleged offsetting claim fails in its entirety.

[7]

Terms of relief

On the conclusions I have reached, Grandview has established the existence of an offsetting claim but in an amount significantly less than the sum in the statutory demand. The Court has the power to set aside a statutory demand under s 459H(4), but that power is discretionary. If the power is exercised at all, conditions may be imposed: s 459M.
Counsel for Budget submitted that, if the Court concluded that Grandview had an offsetting claim, the Court should impose a requirement that the relevant amount be paid into Court as a condition of the grant of any relief. This was opposed by counsel for Grandview. Counsel submitted that an entitlement to payment arising under the SOP Act is an interim one, in the sense that the rights and liabilities of the parties to the contract remain ultimately open to curial determination. Counsel submitted that the service of statutory demand under the Corporations Act was not an appropriate vehicle for recovering unpaid payment claims or adjudication amounts under the SOP Act. Reference was made to the decisions of Palmer J in Aldoga Aluminium Pty Ltd v De Silva Starr Pty Ltd [2005] NSWSC 284 at [10]-[11] and White J (as his Honour then was) in Plus 55 Village Management Pty Ltd v Parisi Homes Pty Ltd [2005] NSWSC 559 at [11]-[12].
Counsel pointed out that the total of the progress claims the subject of the statutory demand and the amount received by Budget under previous progress claims was only about $32,000 less than Budget would be entitled to if it completed all of the contract works. Given Mr Sanig's estimate of costs to complete the work of $260,000, counsel submitted that Budget had clearly overcharged Grandview in its claims for the work which it had done and the only issue was the degree of overcharging. Counsel also submitted that the debt arose because of a "procedural defect", namely that the claim had been overlooked until after the period for responding to the payment claim under the SOP Act had expired. Counsel submitted that Grandview had offered opportunities in February 2018 and March 2018 for Budget to return to the site and it had declined to do so.
I am unable to accept these submissions. The SOP Act manifests an intention on the part of Parliament to give building contractors and sub-contractors the benefit of a new regime for payment claims. Claims which are accepted, or not challenged, or, if challenged, are upheld by adjudication, have been made into debts which are immediately enforceable. The rule is "pay first, litigate later". A person who retains a contractor or sub-contractor to undertake building work, and who does not have sufficient finance available to do business on this basis, is at risk of being wound up.
To say this is not to interpret, or read down, the Commonwealth statutory provisions of the Corporations Act by reference to the objectives of the SOP Act, being State legislation; cf M & D Demir Pty Ltd v Graf Plumbing Pty Ltd [2004] NSWSC 553 at [20]; Re J Group Constructions at [159]. It is to recognise that companies engaged in the building industry operate in a commercial and legal environment governed by the SOP Act and that the existence or otherwise of debts, disputes as to those debts, and offsetting claims, falls to be determined in accordance with State law, and in particular the SOP Act.
It is true that a contractor who has an undisputed debt under a progress claim may have other methods of enforcement of the debt available and that the Court's insolvency processes should not be used for debt collecting. But that does not mean that a company that owes a debt under the SOP Act should be able to avoid the insolvency consequences of failure to pay it.
In my view, to accept counsel's submission would be contrary to the approach in Diploma which was adopted in NSW in Re Douglas Aerospace and with which I respectfully agree. Indeed, the earlier decisions in Plus 55 and Aldoga were expressly considered by Brereton J in Re Douglas Aerospace. Whether Grandview's failure to challenge the second payment claim (it actually accepted the first) was inadvertent or not, Grandview must bear the consequences. Those consequences include not only that the debt is due and owing, but that Budget was entitled to suspend work, and had no obligation to return to the site while the debt was unpaid.
Counsel submitted that I should not impose any conditions for a further reason. Counsel relied on the decision of Palmer J in Get'm Pty Ltd v Triulcio [2004] NSWSC 291. His Honour referred to the earlier decision of Barrett J in Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach (No 2) [2003] NSWSC 896, where Barrett J set aside a statutory demand on the basis of genuine dispute albeit that he had "significant doubt" about whether the plaintiff would eventually prevail and made an order requiring the disputed amount to be paid into Court. Palmer J said (at 30): His Honour's decision was founded upon "the particular circumstances" to which he had earlier referred in his judgment. I do not think that his Honour intended to lay down a general proposition that orders for payment into court should readily be made as a condition of setting aside statutory demands. If this became the practice, then this Court, in the process of exercising its jurisdiction under the Corporations Act would, in effect, become a small claims court because creditors would routinely serve statutory demands intending to seek an order that, even if the demand is set aside because of the existence of a genuine dispute, the debtor nevertheless pay into Court a substantial amount. If such applications were routinely entertained, this Court would frequently have to embark on the question of "degree of genuineness" of disputes and would be compelled to investigate the merits of the dispute to a depth which it refuses to do, as the law presently stands. I would prefer to reserve a decision as to whether conditions should be imposed pursuant to s.459M to a case-by-case consideration based upon the particular facts of the case, as Barrett J did in Panel Tech Industries.
Counsel acknowledged that in Panel Tech an order had been made requiring the disputed debt to be paid into Court, and that Gleeson JA made a similar order in Re Wabbits Pty Ltd [2018] NSWSC 532, but contended that those decisions were distinguishable on the basis of the small amount of money involved and the doubtfulness of the points raised by way of dispute to the statutory demands in question.
In Macleay Nominees v Belle Property East Pty Ltd [2001] NSWSC 743 the statutory demand claimed a debt allegedly arising from advertising fees, expenses and sales commissions for the sale of a number of units in a property development. A set-aside application was made based upon an alleged offsetting claim for negligence in marketing advice given. Palmer J found that the offsetting claim was a genuine one and that the statutory demand should be set aside, but required undertakings from the plaintiff to commence proceedings against the defendant for the offsetting claim (and any other causes of action arising out of the dealings between the parties) and to pay a sum of $100,000 into Court in those proceedings. The statutory demand claimed $120,000 and his Honour selected the figure of $100,000 because, to the extent the cross demand exceeded $20,000, his Honour regarded the claim as doubtful albeit not completely unarguable.
The decisions in Panel Tech, Get'm and Re Wabbits all involved the defendant raising a dispute as to whether the debt claimed in the statutory demand was payable. The present case is different. The debt is not disputed, and the plaintiff's contention is that it has an offsetting claim. That was also the case in Macleay Nominees. In Get'm, Palmer J said of that decision (at [24]-[25]): 24. In that case, the debtor did not contest that it was indebted to the creditor. What was set up by way of a genuine dispute was an offsetting claim which the debtor sought to raise against the creditor such as was said to exceed the original debt. The particulars of the alleged claim giving rise to an offset were nebulous indeed and were barely sufficient to satisfy the Court that there was a genuine dispute. Of course at that stage, nothing having been formulated by the debtor other than somewhat vague allegations, it was quite possible, as matters then stood, that the statutory demand could be set aside on the basis of the postulated claim by the defendant but the defendant thereafter would do nothing to advance its case or prosecute its claim so that the creditor would be stultified, perhaps indefinitely, in endeavouring either to obtain its money by recourse to service of a statutory demand or else to bring the dispute to a resolution. 25. In those circumstances, I deemed it appropriate to impose conditions on the setting aside of the statutory demand, those conditions being, firstly, an undertaking on the part of the debtor to prosecute its claim diligently and, secondly, an undertaking to pay into Court a substantial sum to meet the creditor's claim since it was clear that the debtor was unlikely to establish its cross claim in an amount sufficient to extinguish wholly the debt of the creditor.
I was told from the Bar Table by counsel for Grandview that it has not commenced any proceedings to vindicate the offsetting claim it has asserted in this case. Counsel said that Grandview had "contented itself" with pursuing these proceedings to challenge the statutory demand.
This is an unsatisfactory situation. I have already referred to the length of time it has taken the parties to bring these proceedings to final hearing. For more than eight months, Budget has been unable to pursue insolvency action as a result of Grandview's failure to pay an undisputed debt because of an asserted offsetting claim which Grandview has not pursued and Budget cannot force Grandview to pursue. This is a clear case of what Palmer J referred to in Macleay Nominees as a creditor being stultified.
In my view, a company facing a statutory demand which it contests on the ground of an offsetting claim should be expected to take immediate action to bring that claim forward for determination in the proper forum. If the company does not do so, it is at risk of the Court concluding that the asserted offsetting claim is not genuine (John Shearer at 148). The Court may also exercise its discretion to refuse to set aside the statutory demand even if an offsetting claim is established, or exercise its power under s 459M to impose conditions on the grant of relief.
In a case where the debt is not disputed and the only question is whether there is an offsetting claim, there is no risk of the Court being transformed into a debt collecting court if it requires undertakings of the type required in Macleay Nominees. Such undertakings do no more than have the salutary effect of requiring the debtor to show that it is serious about bringing the claim, by requiring the debtor to pursue the claim in the proper venue. For these reasons, I consider that I should require similar undertakings from Grandview in this case as a condition of granting any relief in the form of reducing the statutory demand to reflect the offsetting claim.
Grandview's liquidated damages claim cannot be characterised as nebulous or vague, as in Macleay Nominees. But its quantum is seriously contestable, particularly for the period after 4 January. I do not propose to make some sort of preliminary analysis of the quantum of the claim. Given Grandview's delay, I will require that it undertake to pay the full amount of the alleged offsetting claim, namely $220,000, into court as a condition of relief.
For these reasons, I would be prepared to make an order reducing the amount of the statutory demand by $220,000 but only on terms that Grandview undertake to commence proceedings as quickly as reasonably practicable to assert its offsetting claim (along with any other claim arising out of the subcontract), to pay the sum of $220,000 into Court in those proceedings, and thereafter to prosecute the proceedings with all due dispatch.
I will adjourn the proceedings for a short time to allow Grandview to decide whether to accept these terms.

At a glance

Court

Decision date

Before

Source

Judgment (8 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (29)

Cited By (7)