Jem Developments v Hansen Yuncken [2006] NSWSC 1308 | Case summary

2349/06 JEM DEVELOPMENTS PTY LTD & ANOR V HANSEN YUNCKEN PTY LTD JUDGMENT 1 HIS HONOUR: This is an application by the plaintiffs (to whom I shall refer, together, as "Jempac") under s 459G of the Corporations Act 2001 (Cth) to set aside a statutory demand served on them by the defendant ("HY"). The plaintiffs say they have offsetting claims which exceed the amount demanded. In the alternate, they submit that the demand should be set aside on "other grounds" within the meaning of s 459J, on the basis that the defendant failed to follow a contractual dispute resolution procedure and that the demand is an abuse of process. The building contract 2 Jempac are property developers and the proprietors of a site in Wollongong. On 27 January 2004 they entered into a building contract with HY in the sum of $25.08 million, for HY as a builder to construct a building on the site, to be known as "The Landmark", comprising a block of residential apartments, a ground floor commercial area, and several levels of basement/car park. 3 The building contract appointed Jempac Developments Pty Ltd as "Superintendent", and contained the following relevant provisions: · HY was obliged to comply with the Superintendent's "directions" (defined to include payment certificates and decisions) (clause 23); · if HY was dissatisfied with any certificate issued by the Superintendent, it was entitled to seek review by a nominated person (clause 23); · if HY did not comply with the Superintendent's instructions, then there was a procedure permitting Jempac to employ others to do the work necessary to give effect to the instructions and recover the costs from HY as a debt (clause 24A); · the Superintendent was empowered to direct HY to rectify work that was not in accordance with the contract (clause 30.3); · if HY failed to reach practical completion by the date specified, it was required to pay liquidated damages at a specified rate ($11,000 per day) until the date of practical completion was reached or the contract was terminated; the Superintendent was empowered to issue provisional assessments of amounts of liquidated damages due; and Jempac was authorised to deduct any such amount from the amount certified for progress payments (clause 35.6); · any entitlement of Jempac to liquidated damages was without prejudice to its entitlement to claim general damages (clauses 35.6 and 67); · there was a defect liability period of 52 weeks commencing on the date of practical completion, and a procedure permitting Jempac to have rectification work carried out at HY's expense if HY did not rectify defects (clause 37); · there was provision for HY to make payment claims to the Superintendent and for the Superintendent to issue a payment certificate stating the amount of a payment which, in the Superintendent's opinion, was to be made by Jempac to HY or by HY to Jempac, and for Jempac to pay the amount certified to be due by it subject to any set-off or deduction it was permitted to make under the contract or by law (clause 42); · if a dispute arose in connection with the building contract (including a dispute concerning a certificate given by the Superintendent), there was a procedure for dispute resolution (clause 47); · there was provision for the building of a display apartment, to be used as a prototype to establish the finished look of the apartments and to be used to provide benchmarks to facilitate the achievement of practical completion (clause 73.5). The settlement deed and practical completion 4 During April and May 2004 several claims were made by HY for extensions of time and disruption costs. HY and Jempac agreed to resolve their differences concerning these claims, and accordingly they executed a deed dated 18 June 2004 ("the settlement deed", or "the deed"). The deed provided (clause 4.1) that in consideration of Jempac paying HY a sum of $500,000 referred to as "the Bonus", which was a payment in addition to the contract sum, HY withdrew all its claims against Jempac, including the particular claims it had made in April and May 2004, and HY released Jempac from all claims it may have had in connection with the building contract and the Project up to the date of the deed (clause 4.2). The date for practical completion was extended to 25 July 2005 (clause 6.1). 5 Clause 2 of the deed was in the following terms: " 2. Payment 2.1 The Principal agrees (without making any admission whatsoever) to pay to the Contractor a bonus of $500,000 (inclusive of GST) (the Bonus) in addition to the Contract Sum under the Agreement subject to the following: (1) The payment of the Bonus will not be paid by the Principal to the Contractor: (a) until 60 days after the Works reach Practical Completion in accordance with the Agreement; or (b) unless the Contractor properly terminates the Agreement in accordance with Clause 44.9 of the Agreement. (2) The Bonus will rank in priority before any entitlement of the Principal to receive monies in connection with the Project. (3) The parties agree that the payment of the Bonus is a matter entirely between the Principal and the Contractor and will not form part of any finance that any Financier is providing. (4) Notwithstanding any provision in the Building Contract Tie In Deed executed on 3 May 2004, any Financier's obligations to the Contractor having exercised any rights of assumption, novation or otherwise will not include the Principal's obligation to pay the Bonus including in circumstances where any Financier becomes mortgagees in possession and/or receiver. (5) The parties will have No Claim against any Financier with respect to the Bonus." 6 The deed of June 2004 was not intended to replace the building contract. Work continued under the building contract until practical completion was achieved on 3 November 2005, some 101 days later than the revised date for practical completion set out in the deed. HY contended that, by virtue of practical completion having occurred on 3 November 2005, the sum of $500,000 had fallen due under the settlement deed on 2 January 2006. It claimed payment, notwithstanding the disputes about alleged defective work and delay. Defects claims 7 Well before practical completion had occurred, further disputes had developed between Jempac and HY. Jempac commissioned Tracy Brunstrom & Hammond Group ("TBH") to review and report on extension of time claims made by HY. TBH reported on 11 May 2005. The report concluded that HY was not entitled to such extensions of time as would alter the date of practical completion, 25 July 2005. TBH provided a further report on 25 May 2005, commissioned by Jempac after they became concerned that HY were not performing the works in a timely manner. 8 One of the issues that developed was Jempac's contention that the facade was defective. On 11 August 2005 the Superintendent sent HY a letter on this subject, requesting rectification. He followed that up, on 16 September 2005, with a Notice of Defective Work issued pursuant to clause 30.3 of the building contract. On 7 October 2005 the Superintendent issued HY with a Notice Requiring Compliance with Instruction pursuant to clause 24A of the building contract, in relation to the defective facade, referring to the previous notice of 16 September 2005. 9 On 23 January 2006 the Superintendent obtained a report ("the first MB report") from Mitchell Brandtman, quantity surveyors, which estimated the cost of rectifying facade jointing at $550,000 and estimated the costs of rectifying sundry other defects at approximately $225,000. On the following day, and again on 13 February and 15 March 2006, the Superintendent responded to payment claims by HY by issuing payment certificates in negative sums. The payment certificates in each case identified the progress value of the works and then made deductions for amounts previously paid and also for liquidated damages and defective works. The deduction for liquidated damages, in the sum of $1,111,000, was for the number of days between the revised date of practical completion and the actual date of practical completion at the rate of $11,000 per day. The amount deducted for defective works was approximately the amount identified by Mitchell Brandtman. The payment certificate issued by the Superintendent on 15 March 2006 certified a net negative amount of $127,908.12. 10 On 11 April 2006 the Superintendent forwarded to HY a list of defect notices previously issued under the building contract. Jempac commissioned a report from Arup Facade Engineering ("Arup"), which issued its report on 19 April 2006. The report commented critically on the quality of the facade joints constructed by HY, in terms of the aesthetic standard achieved and compliance with the proper installation standard. Arup issued another short report on 8 May 2006, commenting upon rectification of the defective facade. 11 On the same day Mitchell Brandtman provided a further report ("the second MB report"), which quantified the cost of "addressing the aesthetic issues in relation to the external facade" at $434,500, over and above the amount identified in the first MB report. Thus, in the opinion Mitchell Brandtman, the total cost of rectification was $1,208,941. 12 The Superintendent issued a further payment certificate on 19 May 2006, again in a negative amount. The payment certificate took into account $1,111,000 for liquidated damages and made provision for rectification costs of $1,212,255. This led to a net negative amount of $590,931.32. 13 On 3 July 2006 Mitchell Brandtman issued a further report ("the third MB report") which quantified rectification costs at $1,062,990 plus $80,000 for scaffolding and $29,951 for incomplete work, a total (including GST) of $1,290,235. Most of this amount related to the defective facade (described as "item 1.3", being the estimate of $550,000 in the first MB report, and the additional estimate of $434,500 in the second MB report, plus $80,000 the scaffolding), but remedial work on other defects was quantified at $119,285 (that is, the sum of all of the remedial costs less item 1.3). 14 On 26 July 2006 Arup issued a further report, critical of the facade, suggesting a scope of rectification. The report notes that rectification would be substantial, including removal of existing painted finishes by grinding, and rendering the entire facade to achieve a uniform finish, as well as removal and replacement of all joint sealants. On 8 August 2006 Mitchell Brandtman issued another report ("the fourth MB report"), which estimated the cost of rectification of the facade, in accordance with the scope of work suggested by the Arup report, at $1,273,526 (including GST). 15 On 31 July 2006 Jempac issued a notice of dispute under clause 47.1 of the building contract, attaching a draft summons. HY did not issue any notice of dispute. On 24 November 2006, after an unsuccessful attempt at mediation, Jempac filed a summons in this court, in the Technology and Construction List. The summons has been served. Jempac's estimated offsetting claims 16 Mr Sidney Macdessi, a director of the first plaintiff, has given evidence estimating losses suffered by Jempac by virtue of late completion of the project. His evidence is found partly in his affidavit of 13 April 2006, filed with the originating process under s 459G, and partly in two later affidavits. Part of the loss is said to arise because Jempac is the proprietor of the Ironworkers building, which adjoins the site, and it is said that delay in completion of the Landmark project affected Jempac's ability to find tenants and charge the intended commercial rents in the Ironworkers building, because tenants in the Ironworkers building are to have access to the underground parking facilities in Landmark. 17 Jempac's quantification of its claim for general damages arising out of HY's delay in completion is conveniently summarised in the written submissions of counsel for the plaintiffs, para 46. The various items of claim relates to such matters as rental discount to commercial tenants, costs of project management, overheads and preliminaries, and interest and fees on loan facilities. It suffices to note that the total claim is $2,082,992. It is unnecessary for me to make any finding about the validity or quantum of the claim. The statutory demand and commencement of this proceeding 18 HY's statutory demand was dated 22 March 2006 and was served on Jempac on 23 March 2006. The document referred to the building contract and the subsequent dispute resolved by the settlement deed, and asserted that under clause 2 of the settlement deed, payment of $500,000 had fallen due on 2 January 2006 and had not been paid. No mention was made of the delay in completion or Jempac's allegations of defective work, or the Superintendent's payment certificates. 19 On 5 April 2006 Jempac's solicitors wrote to HY's solicitors, asserting, inter alia, that Jempac had an offsetting claim against HY. The letter claimed it was clear from the payment certificate dated 15 March 2006 and related correspondence, that Jempac had substantial offsetting claims against HY for defective and incomplete works and liquidated damages, and that the offsetting amount was substantially in excess of $500,000. HY's solicitors responded by drawing attention to clause 2.1(2) of the settlement deed of June 2004 and professing not to understand, in view of that provision, how Jempac could have an entitlement to claim either a genuine dispute or an offset for any moneys owing in relation to the project. The letter also offered to settle the matter by accepting $372,091.88, that is the claim for $500,000 less the certified negative amount contained in the payment certificate of 15 March 2006. 20 Jempac's originating process to set aside the statutory demand was filed on 13 April 2006. The submissions of the parties 21 At the hearing, Jempac relied on the following four contentions: · first, that it has an offsetting claim under s 459H against HY well in excess of $1 million, comprising damages for late completion and damages for defective work (the largest component of which relates to the defective facade); · second, that Jempac has an offsetting claim under s 459H in the sum of $590,939.92, the negative amount of the payment certificate dated 19 May 2006, being an amount that HY was obliged to pay under the building contract; · third, that the statutory demand should be set aside under s 459J on the ground that the building contract contained a dispute resolution procedure (clause 47) which prohibited HY from issuing the demand until it had complied with the procedure, and HY had not complied with the procedure; · fourth, that HY embarked on a winding up procedure for an improper purpose, namely to compel a solvent company to pay a disputed debt, and the demand constituted an abuse of process, and accordingly should be set aside under s 459J. 22 HY made two principal submissions in answer to Jempac's case. First, it said that in view of the terms of clause 2.1(2), Jempac's claims for damages for delay and defective work cannot be offset against its claim under clause 2 for payment of $500,000. Therefore Jempac cannot have any offsetting claim for the purposes of s 459H, and there is no abuse of process justifying the setting aside of the demand under s 459J. Further, the entitlement to recover $500,000 under clause 2 stands outside the building contract and is not qualified by the alternative dispute resolution procedure under clause 47. 23 Secondly, HY submitted that Mr Macdessi's affidavit of 13 April 2006, which was the affidavit supporting Jempac's application to set aside the statutory demand, did not satisfy the principle in Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452, at 459 per Sundberg J, namely that the affidavit filed under s 459G(3)(a) must disclose facts showing that there is a genuine dispute or offsetting claim between the parties. This submission relied on the distinction between an affidavit and any annexures to it, on the one hand, and documents exhibited to the affidavit, on the other hand. It was contended, relying on Carter v Roberts [1903] 2 Ch 312 and Robowash Pty Ltd v Robowash Finance Pty Ltd (2000) 158 FLR 338, that the exhibits to an affidavit are not part of the affidavit "filed" under s 459G(3)(a) (indeed, in this court the exhibits cannot be filed: Uniform Civil Procedure Rules, rule 35.6(5)). Therefore, it was submitted, the contents of any exhibits to an affidavit in support of a s 459G application cannot be taken into account for the purpose of assessing whether the affidavit satisfies the Graywinter principle. 24 Unlike many of the supporting affidavits one encounters in s 459G applications, which give the appearance of being hurriedly put together, Mr Macdessi's affidavit of 13 April 2006 appears on its face to have been carefully prepared and documented. But the documentary support is found in two lever-arch folders of exhibits, rather than in the body of the affidavit or in annexures to it. Counsel for HY submitted that the court cannot have regard to the exhibits in assessing whether an offsetting claim has been made out, and that if the exhibits are disregarded the affidavit is inadequate. 25 For the reasons I shall state, I have reached the conclusion that HY's first submission is correct, and therefore that the application to set aside the demand substantially fails on that ground. That being so, it is unnecessary for me to deal with HY's second submission. The point was raised in a written submission provided to my chambers only 30 minutes before the commencement of the hearing, and not seen by counsel for Jempac prior to commencement of the hearing (I do not say this critically, as unfortunately there were no pre-trial directions). While the substance of the first submission was raised in correspondence in April 2006, the point made in the second submission does not seem to have been raised at any earlier time than when the written submissions were delivered on the day of the hearing. I am therefore not satisfied that the second submission, a decision on which would have important implications for practice in s 459G applications, has been fully tested in argument. Consequently, I have decided that the best course is not to express any views about it in the present case. The concept of "offsetting claim" 26 I received comprehensive submissions from counsel for Jempac, which took me to the substantial line of authorities dealing with the meaning of "offsetting claim" (most of which I referred to in my decision in POS Media v B Family [2003] NSWSC 147). Perhaps the observations most often cited are those of Palmer J in Macleay Nominees Pty Ltd v Bell Property East Pty Ltd [2001] NSWSC 743, where his Honour said (at [18]): "In my opinion, a genuine offsetting claim for the purposes of CA s 459H(1) and s 450H(2) means a claim on a cause of action advanced in good faith, for an amount claimed in good faith. "Good faith" means arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful. In a claim for liquidated damages for economic loss, the Court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff produces some evidence to show the basis upon which the loss is said to arise and how that loss is calculated. If such evidence is entirely lacking, the Court cannot find that there is a genuine offsetting claim for the purposes of s 459H." 27 It has been said that the concept of an offsetting claim is closely comparable with the concept of a genuine dispute under s 459H, described by McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787, as a "plausible contention requiring investigation", which raises much the same sort of considerations as the "serious question to be tried" criterion for the availability of an interlocutory injunction. It has also been said that the level to be reached in such a case is low (Asia Pacific Glass Pty Ltd v Sindea Trading Co [2003] NSWSC 334 at [22] per Barrett J). 28 The cases to which I have been referred pay attention to the question of how far the court should enter into the merits of a claim for the purposes of a determination under s 459H, but little attention has so far been given to the meaning of the word "offsetting". It is not necessary for present purposes to attempt any general definition, or to relate that concept to the law of equitable set-off. However, this case raises the question whether it is open to the parties to a contract to stipulate that a particular payment obligation is to be performed separately from any rights of counter-claim or set-off. 29 That issue was addressed by the House of Lords in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689. Lord Salmon said (at 722-3): "The parties to building contracts or sub-contracts, like the parties to any other type of contract, are, of course, entitled to incorporate in their contract any clause they please. There is nothing to prevent them from extinguishing, curtailing or enlarging the ordinary rights of set-off, provided they do so expressly or by clear implication." Similar views were expressed in the other speeches in that case. 30 There is no good reason for denying effect to a contractual stipulation that is intended to segregate a particular debt and prevent it from being reduced by debts owing by the creditor to the debtor and by counter-claims of the debtor against the creditor. Thus, if A and B enter into a contract by which they agree that in stated circumstances, A will pay B $500,000, without any deduction for any debt that B may owe to A or any claim that A may have against B, and then the payment of $500,000 falls due and payable by A, then as a matter of contractual stipulation, A is prevented from reducing the payment obligation by reference to counter-debts or counter-claims. That being so, if B makes a statutory demand upon A under s 459E for payment of $500,000, A is prevented by the contract from relying on any claim it has against B as an offsetting claim for the purposes of s 459H. HY's claim for payment of $500,000 31 The question, therefore, is whether Jempac and HY have bound themselves contractually to segregate Jempac's payment obligation created by clause 2 of the settlement deed from all counter-debts and counter-claims of Jempac against HY. That is a question of construction of clause 2.1(2). 32 Clause 2.1(2) says that the Bonus will "rank in priority before any entitlement of [Jempac] to receive monies in connection with the Project". The concept of a debt ranking in priority is usually encountered in the law of insolvency, where the priority referred to is priority between classes of debts owed by the insolvent entity. Here the concept of "ranking in priority" is applied by the subclause as between a payment obligation and a payment entitlement, namely Jempac's obligation to pay $500,000 to HY and Jempac's entitlement to receive money in connection with the Project. In that context, the clause evidently means that Jempac is required to meet its obligation to pay the $500,000 without regard to its entitlement to receive money in connection with the Project and therefore, without any delay in payment or reduction of the payment amount, by reference to any such entitlement. 33 Clause 2.1(2) applies to "any entitlement of [Jempac] to receive monies in connection with the Project". Those words are literally wide enough to apply not only to entitlements to receive money from third parties such as purchasers of units in the development, and any subcontractors who may come to be liable to pay the building proprietor directly, but also to entitlements of Jempac to receive money from HY. In my opinion, the correct construction of the clause is that it applies to entitlements of both kinds, and not merely entitlements to payment from third parties. I say so for the following reasons. 34 First, under various provisions of the building contract, summarised above, Jempac may come to be entitled to receive money from HY. Those provisions include clause 35.6 and clause 42 (which contemplates a negative payment certificate giving rise to a payment obligation by the Builder). The parties must have been aware, at the time of the making of the settlement deed, that money might in future come to be owing by HY to Jempac under the building contract. Indeed, it seems to me likely, at a time when they contemplated that practical completion would not be reached for more than a year, and having regard to the general inevitability of building disputes in large projects, that the parties were aware of the probability that there would be further disputes and of the significant possibility that HY would come to owe money to Jempac for construction delays and defective work claims. It seems to me highly plausible that HY would seek to negotiate a settlement of existing claims for an additional amount that would be preserved regardless of later disputes, and not implausible that Jempac would have agreed to the separate preservation of the settlement amount, in 2004, so as to procure HY to complete the building work within an acceptable timeframe. Therefore, in my view, it is commercially sensible to construe the clause as a provision protecting the payment of $500,000 from later reduction for claims by Jempac. 35 Counsel for Jempac argued that such a construction would produce nonsensical results, for it would mean that if HY later became liable to pay Jempac exactly $500,000 (say, because the Superintendent issued a negative payment certificate for that amount), Jempac would be required by clause 2 to pay $500,000 to HY notwithstanding that HY was required at the same time to pay $500,000 to Jempac. There is, however, commercial sense in that outcome. It is unlikely that any later payment obligation of HY to Jempac would be exactly $500,000, and also unlikely that any such payment obligation would be clear and beyond dispute. What is more probable (and was more probable at the time of entry into the settlement deed) is that a later dispute would lead to a disputed payment obligation that may have to be resolved by the process of alternative dispute resolution provided for in the building contract or, eventually, in the court. It is commercially sensible for parties, confronting the probability of that outcome, to negotiate for a segregated payment of the settlement amount. It follows from this reasoning that I reject the submission by counsel for Jempac that this construction of the subclause is nonsensical. 36 Secondly, in my opinion there is no plausible alternative to the literal construction. One idea explored in argument was that the reference to Jempac's entitlement to receive money in connection with the Project was directed to its entitlement to receive the proceeds of settlement of sales of the units. On this view, the purpose of the subclause was to forestall any argument by Jempac that it could defer payment of the $500,000 until it received sufficient cash flow from the unit sales. But I am persuaded that the subclause should not be construed so that the reference to Jempac's entitlements is confined to entitlements to receive settlement proceeds. At the time of entry into the settlement deed, the parties were aware that receipt of proceeds of sale of units depended upon a number of things happening, including (obviously) the making of contracts, and also the registration of the strata plan and settlement within the stipulated contractual period after registration occurred. They nevertheless agreed that the $500,000 would fall due 60 days after practical completion. In other words they separated the time for payment of the $500,000 from the process of generating cashflow through unit sales. In those circumstances it was unnecessary for them to insert a provision in their agreement preventing Jempac from deferring payment until receipt of settlement proceeds. 37 During argument my attention was drawn to the wording of clause 2.1, according to which the payment would not fall due until 60 days after practical completion. It was pointed out that the clause does not say that payment was due 60 days after practical completion. But if a clause makes provision for payment, and says that payment is not due until a specified date, the effect is that payment is due on and after that date. There is no substance in this point. 38 Counsel for Jempac sought to draw a distinction between entitlement to payment and entitlement to offset a claim. It was submitted that, by virtue of the payment certificate of 19 May 2006, an entitlement had arisen to an amount in excess of $500,000 and Jempac had elected to offset that amount against its payment obligation. That being so, there was (according to this submission) no entitlement to receive monies in connection with the payment, but merely an entitlement to enforce the offsetting. But the offsetting would arise, if at all, only if Jempac had an entitlement to payment of money which could be used for the purpose of offsetting. In my view an entitlement to payment of money falls within the description in the subclause whether or not the entitlement is applied for the purpose of offsetting the payment obligation. 39 Counsel for Jempac submitted, having regard to the terms of the building contract, including the definition of "Contract Sum", that the sum of $500,000, which was the subject of the statutory demand, has in fact been paid, through the process of allowances in the payment certificate. He referred to the Superintendent's payment certificate dated 19 May 2006 and claimed that the superintendent had found, by issuing that certificate, that HY had been paid $590,939.92 in excess of the contract sum. 40 This was not a matter raised directly in any of Mr Macdessi's affidavits, or in Jempac's written submissions. Leaving that point to one side, in my view the submission is incorrect on two grounds. First, the payment certificate on its proper construction distinguishes between amounts previously paid, and such things as liquidated damages and damages for defective works. It is therefore not a certificate as to overpayment. Secondly, in my opinion the adjustments made by the Superintendent under clause 42 to allow for damages claims do not amount to adjustments of the Contract Sum. Clause 1 of the building contract says that the contract sum is $25.08 million "or such other sum as shall be determined from time to time in accordance with the provisions of this Agreement". Clause 42 makes provision for the Contractor to furnish the Superintendent with particulars showing all adjustments to the Contract Sum, and for the Superintendent to issue a certificate which extends to "amounts otherwise due from the Principal to the Contractor and/or due from the Contractor to the Principal arising out of or in connection with the Contract". In other words, clause 42 itself contemplates a distinction between the amount certified in a payment certificate and the amount of adjustments to the Contract Sum. In my view the provisions in the payment certificate for liquidated damages and damages for defective works are not adjustments to the Contract Sum but are provisions dealing with "amounts otherwise due". 41 Consequently I have reached the conclusion, as a matter of construction, that clause 2.1(2) of the settlement deed has the effect that Jempac's obligation to pay $500,000 is not to be eliminated or reduced by reference to any entitlement of Jempac to receive monies in connection with the Project, and a fortiori, by reference to any claim by Jempac against HY in connection with the Project. 42 During the course of argument counsel for Jempac submitted that it was not necessary for his client to persuade the court that as a matter of construction, it was permissible for Jempac to set off claims under the building contract against its payment obligation under clause 2. He contended that all that is needed is for Jempac to show that they had a plausible contention to the effect that their construction of clause 2.1(2) is correct. In my opinion there is a logical flaw in that submission. The case law shows that the court considers the probability of success of the asserted claim only at the low, "plausible contention" level. But the cases do not say that it is enough, for the purpose of the application of s 459H, for the court to reach the view that there is a plausible contention that the claim exists. Section 459H applies only if the court is satisfied that the company has an offsetting claim (s 459H(1)(b)). The court must resolve the question whether there is any offsetting claim, of whatever merit, by making a decision to the normal civil standard. That means, in the present case, that the court must make a decision on the proper construction of clause 2.1(2). 43 I do not regard Re Polaroid Australia Pty Ltd (Supreme Court of New South Wales, Santow J, unreported, 15 December 1997) as inconsistent with the views expressed in the previous paragraph. Santow J there referred with approval to McLelland CJ in Eq's observations in Eyota v Hanave, including the statement that the legislation "requires that the court conclude that there is a dispute and that it is a genuine dispute". The court must reach its conclusion that there is a dispute by applying the normal civil standard. 44 In light of my decision as to the proper construction of clause 2.1(2), and my view as to the meaning of "offsetting" for the purposes of s 459H, Jempac has no offsetting claim for the purposes of that section. Consequently the first and second grounds for setting aside the statutory demand, as set out above, must fail. 45 One of the contentions under s 459J is that it is an abuse of process for HY to use the statutory demand procedure, which is the first step in a process leading to winding up in insolvency, in circumstances where the alleged debtor is said to be part of a group with assets valued in excess of $100 million. Once it is established, however, that HY was entitled to be paid $500,000 on 2 January 2006, without reduction, regardless of the state of account between the parties under the building contract and regardless of any entitlements of Jempac to damages for delay or defective work, there can be no plausible grounds for contending that HY is guilty of an abuse of process simply for demanding payment of the amount to which it is entitled. The law provides a mechanism for the creditor to administer a statutory demand and, if the demand is not met and is not set aside, to take advantage of the statutory presumption of insolvency in subsequent winding up proceedings. There is no basis in the evidence for me to conclude that HY is doing anything other than to take advantage of the procedure that the law makes available. 46 Jempac's other contention under s 459J is that the demand should be set aside because HY has not followed the alternative dispute resolution procedure set out in clause 47 of the building contract. Clause 47 applies only to a dispute between HY and Jempac that "arises out of or in connection with the [building] Contract, including a dispute concerning a direction given by the Superintendent". Here the statutory demand reflects a dispute arising out of the settlement deed but not out of the building contract. The dispute relates to whether the effect of clause 2.1(2) is that HY is entitled to demand payment of $500,000 regardless of any entitlements or claims that Jempac may have against it under the building contract. That is a question of construction of the subclause, rather than a question that depends upon any determination relating to the building contract. Indeed HY's fundamental assertion is that the building contract is irrelevant to its entitlement to be paid the sum it has demanded. 47 For these reasons, each of the grounds advanced by Jempac for setting aside the statutory demand is unsuccessful. Conclusions 48 The construction I have adopted of clause 2.1(2) implies that HY is entitled to payment of the whole of the Bonus of $500,000 without deduction, regardless of the state of account under the building contract. In their letter dated 11 April 2006, HY's solicitors indicated that their client would accept the amount of $372,091.88, which is the amount of $500,000 claimed in the statutory demand, less the amount of the Superintendent's payment certificate of 15 March 2006 in the sum of $127,908.12. The letter was an offer of settlement and the offer was not accepted. Further, the letter made it expressly plain that HY did not accept that it owed Jempac $127,908.12 or that Jempac had an entitlement to claim an offset. In the circumstances, I see no basis for finding that the substantiated amount of Jempac's debt to HY is less than the amount demanded, and accordingly no basis for varying the demand under s 459H(4). 49 Where a company applies in accordance with s 459G for an order setting aside a statutory demand, the court on hearing the application may make an order that extends the period for compliance with the demand, under s 459F(2). The originating process in this case seeks relief under that section. It seems to me appropriate to grant such relief. While I have made a determination of the correct construction of clause 2.1(2) against Jempac, the submissions that they made to the contrary were not wholly implausible, and it may well be that if the subclause had not been there, or had been construed in their favour, they would have succeeded in establishing all the other ingredients of an offsetting claim in excess of the amount of the demand. In these circumstances my view is that it would be unfair to make orders having the effect that the statutory presumption of insolvency, arising under s 459C from failure to comply with a statutory demand, arose 21 days after the service of the demand and is available now for winding up purposes. It is fairer to give Jempac an opportunity, after having received the court's decision, to satisfy the demand and accordingly prevent the presumption of insolvency from arising. 50 As to costs, HY's solicitors identified the contention that they successfully made at the hearing, in their letter of 11 April 2006. Jempac resisted that contention up to the hearing, and at the hearing, and failed. The appropriate order is that Jempac should pay HY's costs. I do not see any proper ground for ordering costs on the indemnity basis, in circumstances where the proper construction of clause 2.1(2) has not been obvious or straightforward. 51 My orders, therefore, will be: (1) order under s 459F(2)(a) extending the period for compliance with the demand, served by the defendant on the plaintiffs on 23 March 2006, up to and including 18 December 2006; (2) order that the originating process otherwise be dismissed; (3) order the plaintiffs to pay the defendant's costs as agreed or assessed.

Jem Developments v Hansen Yuncken

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Judgment (11 paragraphs)

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Cases Cited (5)

Cited By (6)