Heather v Taylor Building Industries Pty Ltd

Supreme Court of NSW|2023-07-10|Before: Rees J, Mr J, Payne JA, Einstein J

Solicitors: McCullough Robertson (Plaintiffs) Contracts Specialist (Defendant) File Number(s): 2023/191340

JUDGMENT

HER HONOUR: This is an application to stay enforcement of a judgment of the District Court of New South Wales in the amount of $176,914.19, entered on the basis of an adjudication certificate issued under the Building and Construction Industry Security of Payments Act 1999 (NSW) (SOPA). Commonly called a Grosvenor or Brodyn stay, "Labels may tend to obscure the extraordinary nature of the relief being sought": A-Civil Aust Pty Ltd v Ceerose Pty Ltd [2023] NSWCA 144 at [23] (per Payne JA, Simpson and Basten AJJA). Such a stay is available where, "there is a certainty" that the applicant's rights will be rendered nugatory and they will suffer irreparable prejudice if the judgment sum is paid: Grosvenor Constructions (NSW) Pty Ltd (in Administration) v Musico [2004] NSWSC 344 at [32] (per Einstein J).
Notwithstanding the small amount in issue, some 1,585 pages of material was advanced on this application. The defendant's builder director, Owen Taylor and his wife, Jana Taylor were cross-examined. As also observed in A-Civil, "It does not follow … that the policy of [SOPA] is to encourage a searching examination into the solvency of those who receive payments made pursuant to the Act when contractual proceedings are contemplated or pending": at [26].

Facts

Andrew Heather is a newly-minted partner at Deloitte. He and his wife decided to renovate their Balmain home. Their architect called for tenders. The builder was chosen. In March 2022, the parties entered into a 'fixed price' building contract for some $1.5 million, albeit the contract provided that the price could be adjusted in certain circumstances and provided a regime for variations. The builder was asked to remove provisional sums and prime cost items, as well as rise and fall clauses, from the contract. An issue at trial will be whether Mr Heather requested this in order to satisfy the requirements of the couple's lender, Macquarie Bank, but also agreed orally to pay for any reasonable costs outside the contract as variations. An amended building contract was also executed. A further issue at trial will be whether the plaintiffs agreed to the inclusion of all parts of the amended contract.
In June and July 2022, the builder submitted various claims for variations. In November 2022, Mr Heather emailed the builder, thanking them for their patience, and confirming that payment was scheduled. Mr Taylor pressed for payment of the variations and sought confirmation of approval of other variations so that he could proceed. On 22 November 2022, Mr Heather and Mr Taylor spoke. The terms of the conversation are in dispute. According to Mr Taylor, he said that cashflow was becoming an issue due to the delays in approving and paying for variations. According to Mr Heather, he was asked to "cash support" the builder until the next stage payment.
On 23 November 2022, the builder sent an email to Mr Heather, setting out its position, noting a series of problems which had arisen in the course of the build and the associated time and cost to the builder. Mr Taylor noted, "We find ourselves not able to financially absorb these costs anymore, in particular the costs associated with delays and/or indecision on approvals at no fault of [the builder]. … The need to now throw a large amount of resources at the project to get it done in time … has, and will, have a major effect on our finances and cashflow in particular". The builder also noted the effects of the Covid-19 Pandemic on supply chain issues, the cost of materials and labour shortages, together with unprecedented wet weather, adding "the financial viability of any construction company is extremely vulnerable. We are no different." The plaintiffs were asked to pay the variations that had already been submitted. Mr Taylor noted that he had been working on the finances and costs for the building project "and the figures are concerning." The builder asked to go through the figures with Mr Heather, noting that he and his wife "are committed to working with you to complete your home but at the moment the figures don't add up … it has now reached a point it is unsustainable from a financial point of view."
The next morning, Mr Taylor, Mr Heather and the architect met. As Mr Taylor described it, no agreement was reached on the timeliness of payments. On 25 November 2022, Mr Taylor sent Mr Heather a spreadsheet setting out when payment was due for current and upcoming works and variations. Mr Taylor noted that invoices need to be paid "ASAP as per our discussions yesterday." Mr Heather replied that the payment terms were "not industry standard and place significant financial strain on us … Assets would have to be liquidated at suboptimal outcomes in order to facilitate your last minute request for such significant funds." Mr Taylor suggested that they meet to discuss the matter further.
On 10 January 2023, Mr Taylor and Mr Heather met to discuss the matter again. Mr Taylor presented a spreadsheet setting out the cost to complete the project, being $247,604 above the price in the building contract. According to Mr Heather, Mr Taylor said that the builder was "running out of cash" and the company was "in your hands." Mr Heather maintained that it was a fixed price contract but said he did not want to send the builder into liquidation, "I think you do good work, the quality is there … But I need more information."
For his part, Mr Taylor denied that the builder had cashflow issues and said he was simply asking for payment of completed variations in accordance with the parties' agreement and previous conduct. I note that some support for this may be found in the builder's bank statement, where the account was then in credit by some $100,000.
Further emails ensued between Mr Heather and Mr Taylor, raising and answering various queries in respect of the builder's spreadsheet. Mr Taylor said he became frustrated and stressed from Mr Heather's "micro-managing and micro-analysing the spreadsheets I provided him."
On 21 January 2023, the builder wrote to the plaintiffs setting out, in detail, the impacts of prolonged wet weather and the ongoing effect of the Covid-19 Pandemic on the cost of the project and sought an additional $218,500 to finish the works in the building contract together with all variations. Mr Taylor followed up this proposal on 30 January 2023. Mr Heather replied that he was consulting with various experts. There is no evidence of a further response from the plaintiffs.
In February 2023, the builder submitted a large number of variation claims. On 13 February 2023, the builder issued a notice of dispute under the building contract. The parties met on 15 February 2023, without resolution.
On 2 March 2023, Mr Taylor and Mr Heather met on site. Whilst the terms of the conversation are disputed, according to Mr Heather, Mr Taylor said he could not afford to finish the job unless Mr Heather paid the variations, while Mr Heather objected to paying for variations that the builder was not entitled to. According to Mr Taylor, he said that he and his wife would not be putting more money into the house and the plaintiffs needed to pay for the work completed.
On 6 March 2023, the architect responded to the variation claims, accepting some but not others. On 26 April 2023, the builder issued a series of revised variations, presumably taking into account the architect's comments. On 28 April 2023, the architect responded to the revised variations, accepting some but not others.
On 1 May 2023, the builder issued a payment claim for 27 variations totalling $169,101.76. Later that day, the architect replied that this was not a valid payment claim in accordance with the contract.
On 3 May 2023, the plaintiffs issued a notice of default to the builder. The builder responded to the notice of default on 12 May 2023, setting out factors outside of its control which were said to have caused delay with the works, in particular, waiting on instructions in relation to revisions in design and variation approval.
On 14 May 2023, the builder obtained an expert report, expressing the view that each of the variations in the payment claim was a legitimate variation which had altered the builder's scope of work. Further, having considered the contract documents, the works were extra works and the costs claimed were fair and reasonable.
On 15 May 2023, the builder lodged an adjudication application. On 22 May 2023, the plaintiffs filed an adjudication response.
On 26 May 2023, the plaintiffs issued a notice of termination of the building contract. On 2 June 2023, the builder responded that the plaintiffs had repudiated the contract; the builder accepted the plaintiffs' repudiation and terminated the contract.
On 5 June 2023, an adjudication determination was issued, allowing the payment claim in full. The adjudicator was satisfied that the architect's email on 1 May 2023 amounted to a payment schedule which proposed to pay $NIL. Where the adjudication response strayed beyond the matter raised in the architect's email, being whether the builder was contractually entitled to have its payment claim assessed under the contract, the adjudicator put the plaintiffs' additional arguments to one side by reason of section 20(2B) of SOPA.
On 15 June 2023, judgment was entered in the District Court in the amount of $176,914.19. The plaintiffs commenced these proceedings, seeking a stay of the judgment. The plaintiffs have paid the judgment sum into Court. Mr Heather is concerned that, if he pays the adjudicated sum to the builder, he will not be able to recover the amount if successful in the substantive proceedings as the builder is likely insolvent. Mr Heather maintains that the variations are not payable as the works were not variations but fell within the original scope of works. Alternatively, the works the subject of the variation claims have not been completed or were not sought in accordance with the contract. Mr Heather said that he and his wife needed finance to fund the renovation and it was important that they could accurately capture all costs and ensure that the cost of the build did not exceed their borrowing capacity. Accordingly, it was important to him that the builder strictly complied with the notice requirements for variations under the building contract "so that we could accurately track the cost build and make conscious and informed budget decisions throughout the build".
Mr Heather has since spoken to a new builder, who said the cost to complete the project was $1.113 million including GST. The architect has suggested that some of the work done by the builder involved cost savings not passed on to the plaintiffs. The architect has since certified that the cost to complete the works will be $1,316,615 such that the builder will be obliged to repay $586,337.79 to the plaintiffs. Mr Heather intends to seek liquidated damages from the builder in the sum of $13,500, some $33,730 in respect of works paid for but not done and damages of $391,765 as a result of the works having to be completed by a new builder.
For his part, Mr Taylor says the builder will be able to repay the adjudicated sum in the event that the plaintiffs are successful in their substantive claim. Mr Taylor said the builder currently had three permanent employees and had four projects which will be completed in the next six months, being in Lewisham, Balmain and Birchgrove, together with the provision of project management services for another builder. The builder continues to submit tenders and quotations for other projects. Mr Taylor said that, after inspecting the company's books and records, it was his opinion that there was little to no risk that the builder would become insolvent if a stay was granted.

Financial position

The builder has been in business for ten years. Mr Taylor and his wife are equal shareholders in the company's issued share capital of $376,672.
For the 2021 financial year, the builder's financial statements reported revenue of $4,270,213, gross profit of $1,558,833 and net profit before tax of $168,489. The balance sheet reported net assets of $105,904.
The builder's financial statements for the 2022 financial year reported significantly reduced revenue of $1,685,261, gross profit of $723,242 and net profit before tax of $37,787. Net assets were slightly higher at $143,691.
The builder has produced its bank statements. I note that, by April 2023, the balance of the builder's bank account had dropped to some $3,600 and was replenished from time to time by transfers from "Taylor Build." (Mrs Taylor works fulltime as a contracts manager for Taylor Build). The company continued to pay wages and other business expenses, including hire purchase payments, rent and a regular payment to Mrs Taylor recorded as director's loans. When these proceedings were commenced, the balance of the account stood at some $2,600.
Mr Taylor agreed that he and his wife had not received wages since January 2023. I am not sure if this is correct: the builder's bank statements show regular payments to Mrs Taylor, described as director's loans.
There is evidence that one subcontractor on this project has not been paid. On 20 June 2023, the builder proposed to pay the air conditioning contractor, owed $23,500, by instalments of $1,000. The builder informed the contractor "we thought this would have been resolved when we won adjudication … all going well at court … we will pay the debt in full. We are sincerely sorry to put you in this position, but we are working our way through until the moneys are awarded." The builder has paid two $1,000 instalments.
Mr Taylor estimated that the net assets of the builder were some $472,000. Apart from tools worth some $100,000, this figure comprised four motor vehicles and cash at bank of some $202,505.55. Mr Taylor's evidence got into difficulty at this point, in two respects. First, the motor vehicles were subject to hire purchase agreements. Mr Taylor explained that he had said that the builder owned the motor vehicles, "I just considered that it is my … asset".
More significant, the screenshot of the "cash in bank" in Mr Taylor's affidavit was, in fact, of Mrs Taylor's bank account. Mrs Taylor said she redacted the account numbers in her husband's affidavit "because I don't trust the plaintiff and I didn't want my account details to be given to him." Mr Taylor said this was a loan facility which could be used by the company. Whilst his wife owned the funds, "we're a small business and I just believe that everything we have is … ours. And that we have access to it." Mrs Taylor also swore an affidavit, deposing that she was willing to loan these moneys to the builder at any time when the builder required.
Mrs Taylor also provided her bank statement in full, which indicated that her bank balance reflected two payments of $100,000 transferred into her account on 28 and 29 June 2023, that is, shortly before her husband swore his affidavit. Mrs Taylor said these funds were provided by her father from a family trust. When asked why the money was transferred into her bank account shortly before her husband swore his affidavit, Mrs Taylor said "because we wanted to show that we had cash to cover the adjudication amount that was coming … that [the builder] had access to a loan facility." Mrs Taylor said the $200,000 was lent to her for use for the company if need be, and she could have it as long as she needed. Mrs Taylor was not, however, amenable to making these funds available to the plaintiffs if the judgment sum had to be repaid. As such, this attempt at 'window dressing' was damaging rather than helpful.
The builder obtained home warranty insurance for this project. Mr Taylor, executed a deed of indemnity with the NSW Self Insurance Corporation, agreeing to indemnify the corporation for up to $256,000 in respect of any claim on the policy. Mr Taylor has personal assets of some $580,000 to draw upon in the event that the indemnity is called upon.
While working on the plaintiffs' project, the builder undertook other building work. The builder took out two further home warranty insurance policies in August 2022 in respect of other residential building work.
The builder has also sought other work, in particular, after relations between these parties soured. On 20 February 2023, the builder quoted on a project in Birchgrove in the amount of $114,734.40 for the excavation for installation of a swimming pool. In evidence are a series of text messages between the client and the builder in May and June 2023, indicating difficulties arranging a site meeting with the builder's waterproofing subcontractor. On 17 June 2023, the customer requested an update on a start date for the project, "I thought we'd be finishing by now." Mr Taylor said that the contract had been entered into, albeit there was no signed contract. Mr Taylor was confident that a written contract would be signed in due course, where the clients were friends, whose children went to the same school and were also friends, "We have been engaged to start the work and we're just waiting on facilitation and co-ordination with the pool builder for him to start."
On 10 March 2023, the builder executed a residential building contract with a client in Lewisham, with an estimated cost of works of $150,000.
On 28 April 2023, the builder quoted on building works in Balmain in the amount of $92,902.92. Mr Taylor said that the contract had been entered into, albeit that there was no signed contract. Mr Taylor said, "We've had multiple conversations with the client and text message correspondence with regards to yes, we want to proceed, when can we start, and we need to start as soon as we can."
The builder also secured project management work through a recruitment company. Mr Taylor said the project management services had a contract price of $57,200 and the agreement had been entered into. On 5 July 2023, the builder was paid $7,425.
In evidence are further text messages in June 2023 received by the builder, asking him to quote on a bathroom renovation in Rozelle. In addition, a property manager requested the builder to undertake repair work on a rental property.

Submissions

The plaintiffs submitted that, if the stay were not granted, the payment was likely to be dissipated by reason of the builder's "dire" financial position. The plaintiffs would suffer irreparable prejudice. The plaintiffs submitted that their substantive case was strong where the reliability of Mr Taylor's evidence was said to be questionable. While Mr Taylor suggested that the building contract was changed and signature pages were copied and inserted into a revised contract, "This is false." I am in no position to form a view of the merits of such a serious allegation on an interlocutory application. The plaintiffs further submitted that their claim for damages was substantially higher that the judgment sum based on inter alia the builder's failure to complete the works by 11 April 2023. There was said to be a strong case that the plaintiffs validly terminated the contract, entitling them to the damages sought.
The plaintiffs submitted that the builder had experienced sustained cash flow issues since November 2022. The builder's efforts to attribute blame on the plaintiffs for additional costs and delays was said to be "a recent invention." (I disagree. This has been a recurring theme of correspondence since November 2022, when the builder began pressing for payment or approval of variations). The plaintiffs pointed to the builder's spreadsheets provided in January 2023, non-payment of air conditioning contractor and 24 creditor enquiries in the past 12 months. While the builder had three permanent employees and expenses of $15,000 per month, only four "small" projects were upcoming, with a combined total contract price of $413,000, being less than a third of the plaintiffs' project. The builder's gross profit dropped by more than 50% in the 2022 financial year. The builder's net profit before interest, tax, depreciation and amortisation was -$94,250. Mr Taylor's assertion that the builder did not have cashflow issues should be rejected. Accordingly, there was said to be a real risk that the company was heading for insolvency.
The plaintiffs submitted that a stay did not offend the objectives of SOPA, namely, the 'pay now, argue later' policy where "later is now." The plaintiffs had filed a List Statement seeking to enforce their contractual rights. (I note, however, that these asserted rights may not be determined for some time; "contract proceedings will entail greater costs, greater delay, and may not confront the risk of the principal's insolvency by a payment into Court": A-Civil at [22]). Further, the building contract had been terminated, such that there was no work for the builder to carry out nor fund. The SOPA regime for progress payments was important to keep builders funded during a project but the builder had left the site. The builder's financial trouble was said to be unrelated to the plaintiffs' non-payment, where it was said that the builder was in financial difficulty long before the payment claim was issued. Further, the plaintiffs were individuals who had invested money to build their dream home; they had a lot to lose if they were unable to recover damages and costs from the builder if they succeeded in the substantive proceedings. The builder had adduced no evidence of inconvenience or prejudice that it may face if the stay is granted, but contended that it did not have cashflow issues.
The builder submitted that it has been in business for ten years, continues to trade, owns significant assets and holds a building licence. It could be readily inferred that, if the plaintiffs were successful in their substantive claim, Mr Taylor would do everything he could to pay the plaintiffs as non-compliance would cause an automatic suspension of the building licence under section 42A of the Home Building Act 1989 (NSW). The contract works were insured. By reason of the deed of indemnity, it was unlikely Mr Taylor would appoint a liquidator to avoid repaying the determined amount. If that did occur, it would be open for the plaintiffs to recover the adjudication determined amount by making an insurance claim on the home warranty insurance scheme.
The builder submitted that the plaintiffs' insistence on strict compliance with contract is respect of variations was undermined by the plaintiffs' multiple requests for variation works without written approval. This conduct was said to amount estoppel by convention. If there was no estoppel, then the builder would nonetheless be entitled to quantum meruit for the fair market value for the variations.

Consideration

The relevant legal principles are uncontroversial and summarised in A-Civil at [20]-[31]; see also Hakea Holdings Pty Ltd v Denham Constructions Pty Ltd [2016] NSWSC 1120 at [4]-[6] (per Ball J). As the Court observed in A-Civil at [20]-[22]: (citations omitted) [20] The risk that a contractor might not be able to refund moneys ultimately found to be due to a developer after a successful civil action by the developer under the contract is a risk which, as a matter of policy in the Security of Payment Act's commercial context, has, prima facie, been assigned to the developer … [21] … the power [to stay or injunct] must be exercised in accordance with the policy of the Security of Payment Act. In both cases a stay or interlocutory injunction will impinge on the two statutory policies, namely, (i) to maintain the flow of money to the subcontractor, and (ii) as an interim measure, to place the risk of insolvency on the principal. [22] The application of the general principles governing the grant of interlocutory relief, including determining whether there is a serious question to be tried and where the balance of convenience lies, will be constrained by the need to give effect to these statutory policies. …
The Court of Appeal referred to "the extraordinary nature" of a stay (at [23]) given the policy of SOPA, against which background the Court's power to grant a stay is exercised. For example, even where a developer established a significant risk that the contractor might not be able to refund an adjudicated amount, this was not be enough to grant a stay, citing Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd [2018] NSWCA 33 at [33] (per Payne JA). The Court concluded in A-Civil at [31]: … there is a heavy burden on a party who seeks injunctive relief or a stay pending the outcome of proceedings contemplated by s 32 [of SOPA] on the basis that a payment may become unrecoverable due to the possible or even likely insolvency of the payee at a later date. Considerable caution should attend the grant of such an injunction or a stay, as to do so may detract from the primary purpose of the Act.
Turning to this case, the builder accepts that the plaintiffs have a prima facie case for final relief. I was unable to form a view as to whether the plaintiffs' case may fairly be described as strong. I do note that some of the contemporaneous emails appear to support the builder's version of events in respect of the contractual arrangements, but I have not examined every document with the rigour of a trial judge.
A stay is less readily available where judgment has been entered following an adjudication determination: Bellerive Homes Pty Ltd v FW Projects Pty Ltd [2018] NSWSC 1435 at [61] (per N Adams J). This is one such case.
The cashflow position of the builder is more tenuous than Mr Taylor was prepared to accept. The financial performance of the builder declined significantly from the 2021 financial year to the 2022 financial year, albeit the company maintained a modest profit and positive net assets.
Based on the evidence on this application, the building work undertaken for the plaintiffs was a large job. It would be unsurprising in these circumstances if the builder's financial resources were largely deployed on the project, such that payment - including for additional work beyond the scope of the contract - was prompt. The builder and its clients were not in agreement on this subject, and it remains to be determined who is right. In the interim, however, the builder's bank account was heavily depleted, replenished from time to time by, apparently, a related company or business.
The fact that a number of credit enquiries had been made in respect of the builder does not add significantly to information about the company's capacity to pay: Brocklands Pty Ltd v Tasmanian Networks Pty Ltd (No 2) [2019] TASSC 37 at [24] (per Blow CJ). The builder has not paid a subcontractor, which is evidence indicating insolvency. The builder has endeavoured to obtain further building work from a variety of sources, albeit each of the jobs, or potential jobs, are on a smaller scale than that undertaken for the plaintiffs. This rather highlights the potential impact on non-payment by the plaintiffs on the builder's finances. The home warranty insurance policy may not assist the plaintiffs, where there is no suggestion that the building work was defective. As such, the plaintiffs may not be entitled to claim on the policy.
Of course, cashflow difficulties are a natural consequence of a principal withholding payment for work, where the moneys which the builder is prima facie entitled to be paid would likely address the cash flow problems identified by a plaintiff: Pheonix Builders Pty Ltd v Deca Australia Pty Ltd: [2021] NSWSC 581 at [20]. While the judgment sum has been paid into Court, the moneys have not been paid to the builder and thus cannot be used in the day-to-day operations of its business; such a result is at odds with the purpose of the Act: Ceerose Pty Ltd v A-Civil Aust Pty Ltd [2022] NSWSC 1487 at [50]. The possibility that a contractor's financial difficulties have been caused by failure to make a payment can militate strongly against the granting of a stay: Brodyn v Davenport (2004) 61 NSWLR 421; [2004] NSWCA 394 at [87] (per Hodgson JA).
Overall, while there is certainly a risk that the builder may become insolvent, but the legislature has placed that risk on the plaintiffs. Indeed, the fact that a stay may have the effect that the builder will become insolvent is a factor in favour of releasing the funds to the builder: Shade Systems at [37]. I am not satisfied, however, that it is a certainty that funds paid to the builder will not be recoverable in the event that the plaintiffs succeed in the substantive proceedings. The builder has been in business for a decade. There are practical reasons why the builder is incentivised to repay the judgment sum in the event that an order is made by this Court as final relief, including suspension of the builder's licence: section 42A(2), Home Building Act 1989 (NSW). The builder does appear to be able to draw on other financial resources if need be. Overall, having considered each of these factors, I am not prepared to grant a stay.

Orders

The plaintiffs submitted that costs should be reserved pending the outcome of the substantive proceedings. I disagree. This application has put the builder to significant cost. Those costs should be paid now. For these reasons, I make the following orders: 1. Dismiss prayer 1 of the Technology and Construction List Summons with costs. 2. Order that the sum of $174,417.91 held in Court, together with any interest accrued, be paid to the defendant forthwith.

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: 18 August 2023

Building and Construction Industry Security of Payments Act 1999(NSW)

At a glance

Court

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Before

Source

Judgment (8 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (10)