Kennedy Civil Contracting Pty Ltd (subject to Deed of Company Arrangement) v Linx Constructions Pty Ltd

Background

1. The background to the appeal, derived from the learned Magistrate's reasons for judgment, can be adequately summarised as follows. KCC, which operated in the building and construction industry, served on Linx on or about 25 May 2022 a payment claim for $147,879.17 within s 13 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SOP Act). Linx did not provide a payment schedule to KCC in accordance with s 14 of the SOP Act and accordingly, by virtue of s 14(4), Linx became liable to pay the claimed amount to KCC on the due date for the progress payment to which the payment claim related.
2. In these circumstances, under s 15(2)(a)(i) of the SOP Act KCC was entitled to "recover the unpaid portion of the claimed amount from [Linx], as a debt due to [KCC], in any court of competent jurisdiction".
3. KCC brought recovery proceedings in the Local Court claiming $45,079.17 as the unpaid portion of the amount claimed in the payment claim served on about 25 May 2022.
4. In the Local Court, the issues between the parties were narrowed so that there were in essence only two remaining issues to be determined in the proceedings: 1. whether the director of KCC, Mr Kennedy, withdrew the May payment claim with the effect that the payment claim could not then be relied upon to found KCC's claim in the Local Court; and 2. whether "the offsetting claim, referred to in the defence, reduce[d] any amount owed by [Linx] to [KCC]" under the payment claim, which was also described by the learned Magistrate as "a determination of the proper quantum that [KCC] is entitled to judgment for".
5. As to the first issue, the Magistrate found that Mr Kennedy had not withdrawn the payment claim and there was no challenge to this finding on this appeal.

The reasons for judgment of the Local Court

1. In relation to the second issue, the Magistrate set out the submissions of both parties and it is useful to repeat them in full as they provide the foundation for understanding his Honour's reasoning on this issue. KCC's claims or submissions on this issue were recorded as follows: "(a) [Linx] advances a cross-claim arising from an agreement reached with Civilcast as a result of which, [Linx] pays Civilcast $30,083.35; (b) [Linx] is prohibited from raising a cross-claim to oppose the entry of judgment by operation of s 15(b)(i) of the [SOP] Act; (c) the transaction did not involve [Linx] as a contracted party and [Linx] reached a commercial agreement with Civilcast as a result of which Civilcast issues an invoice to [Linx] for $30,083.35 which it paid. (d) the agreement with Civilcast was reached on 8 August 2022 after the appointment of an administrator [to KCC] on 1 August 2022 and the administrator was not involved in the agreement; (e) this payment was not made at the direction of [KCC], but was a private arrangement between [Linx] and Civilcast, and the payment was not made on behalf of [KCC]; (f) the payment was not a payment to the claimant, as required by s 14 of the Act, so are not defences to judgment under s 15(2)(a)(i); (g) the claim or payment is properly characterised as a cross-claim within the meaning of s 15(4)(b)(i) of the [SOP] Act and cannot be entertained; (h) if it purports to be a claim for unjust enrichment, then unjust enrichment is a cause of action and therefore must be a cross-claim for the purposes of s 15(4)(i) of the [SOP] Act. (j) [Linx] has not established that [KCC] was enriched, or was enriched at the expense of [Linx]; and (k) the Court does not know the contractual arrangement between [Linx] and Civilcast and there is no evidence in relation to it."
2. Linx's submissions were noted to be: "(a) Civilcast supplied products to [KCC] that were to be used in undertaking the works being carried out by [KCC] for [Linx]. (b) for the supply of those products, Civilcast issued three invoices to [KCC], and two of those, totalling $36,268.10 were issued to [KCC] before the May payment claim was issued to [Linx] on 25 May 2022; (c) Mr Kennedy confirmed in cross-examination that two invoices formed part of the May payment claim, and if these debts were satisfied, the amount of the May payment claim would be reduced. (d) Mr Kennedy's evidence confirmed that of the $147,879.17 that was included in the May payment claim, $36,268.10 was to be paid to Civilcast, and if those two invoices were paid, the May payment claim would be reduced; (e) on 12 August 2022, [Linx] paid Civilcast the amount of $30,083.35 as part of a commercial agreement to settle the debts owed by [KCC] to Civilcast, relating to the three invoices. (f) therefore, [KCC] no longer owes Civilcast $36,268.10 that had been incorporated into the May payment claim, and this should be taken into account in determining the extent to which the debt under the May payment claim has been satisfied; (g) to do otherwise would give [KCC] a windfall gain, as [KCC] is still pressing an entitlement to be paid $36,268.10. (h) this issue does not require the Court to impermissibly consider a cross-claim, offsetting claim or defence. That is not permitted under the Act. It is merely a factual contention going towards what level of debt, if any, is outstanding under the May payment claim. (i) it is implying a consideration as to whether the underlying debt, comprising of the May payment claim, has been satisfied; and (j) [KCC's] claim should be reduced to $8,811.07 or $14,995.82."
3. His Honour's reasoning in relation to the second issue involved in effect consideration first of whether the payment of the $30,083.35 by Linx to Civilcast was advanced as a "cross-claim, offsetting claim or defence", which would be prohibited by virtue of s 15(4)(b)(i) of the SOP Act. The Magistrate concluded that this was not the case, holding: "When consideration is given to the evidence of Mr Kennedy regarding two invoices forming part of the May payment claim, and the extent to which it would be reduced, and the fact of the $36,268.10 was to be paid to Civilcast, I am of the view that, despite [KCC] not being a party to the arrangement between the [Linx] and Civilcast, and the payment not being made on behalf of [KCC], it is not the equivalent of a cross-claim, offsetting claim or defence, as suggested by [KCC]".
4. His Honour then continued, concluding that the issue relating to the payment by Linx to Civilcast of $30,083.35 involved "simply a factual determination that is required to be made about the level of debt outstanding under the May payment claim, as suggested by [Linx]." In this regard, his Honour also accepted Linx's submission that KCC should not be entitled to be paid an amount that it never intended to retain, saying that the situation was similar to what occurred in relation to a payment of $52,800 made by Linx to Veljohn Pty Ltd which had also been taken into account in reducing the May payment claim, without dispute.
5. On these bases, it was concluded that the amount claimed by KCC should be reduced by the amount of $30,083.35. Consequently, KCC was found to be entitled to judgment in the amount of $14,995.82, instead of the $45,079.17 originally claimed.
6. In light of that background and the Magistrate's reasons for judgment, I turn to consider each of the questions of law raised on this appeal.

Whether reliance on the payment of $30,083.35 by Linx to Civilcast amounted to a cross-claim within s 15(4)(b)(i) of the SOP Act?

1. The first question of law, which related to ground (a), concerned whether Linx's reliance on the payment of $30,083.35 by it to Civilcast amounted to bringing a cross-claim within s 15(4)(b)(i) of the SOP Act and thus was prohibited. To the extent that this question raised the issue of whether what was done by Linx in propounding its case before the Local Court (about which there did not appear to be any factual dispute) fell within the statutory description of "bring[ing] any cross-claim", I was prepared to proceed, as the parties appeared to accept, that this aspect of the appeal was on a question of law, noting the notorious difficulty in distinguishing a question of law from a question of mixed fact and law.
2. The immediate context of s 15(4)(b)(i) is found in ss 14 and 15 of the SOP Act. Those sections relevantly provide: "14 Payment schedules (1) A person on whom a payment claim is served (the respondent) may reply to the claim by providing a payment schedule to the claimant. (2) A payment schedule - (a) must identify the payment claim to which it relates, and (b) must indicate the amount of the payment (if any) that the respondent proposes to make (the scheduled amount). (3) If the scheduled amount is less than the claimed amount, the schedule must indicate why the scheduled amount is less and (if it is less because the respondent is withholding payment for any reason) the respondent's reasons for withholding payment. (4) If - (a) a claimant serves a payment claim on a respondent, and (b) the respondent does not provide a payment schedule to the claimant - (i) within the time required by the relevant construction contract, or (ii) within 10 business days after the payment claim is served, whichever time expires earlier, the respondent becomes liable to pay the claimed amount to the claimant on the due date for the progress payment to which the payment claim relates. 15 Consequences of not paying claimant where no payment schedule (1) This section applies if the respondent - (a) becomes liable to pay the claimed amount to the claimant under section 14(4) as a consequence of having failed to provide a payment schedule to the claimant within the time allowed by that section, and (b) fails to pay the whole or any part of the claimed amount on or before the due date for the progress payment to which the payment claim relates. (2) In those circumstances, the claimant - (a) may - (i) recover the unpaid portion of the claimed amount from the respondent, as a debt due to the claimant, in any court of competent jurisdiction, or … … (4) If the claimant commences proceedings under subsection (2)(a)(i) to recover the unpaid portion of the claimed amount from the respondent as a debt - (a) judgment in favour of the claimant is not to be given unless the court is satisfied of the existence of the circumstances referred to in subsection (1), and (b) the respondent is not, in those proceedings, entitled - (i) to bring any cross-claim against the claimant, or (ii) to raise any defence in relation to matters arising under the construction contract."
3. In the present case, there was no dispute that the May payment claim had been served on Linx under s 14(1) and Linx had not provided a payment schedule in accordance with s 14(1), (2) and (3) and the whole or part of the claimed amount had not been paid on or before the due date. In those circumstances, Linx became liable "to pay the claimed amount to the claimant" under s 14(4) and, by virtue of s 15(1), s 15 applied. Consequently, KCC was entitled under s 15(2)(a) to bring the proceedings in the Local Court to "recover the unpaid portion of the claimed amount" from Linx.
4. By virtue of s 15(4)(b)(i), however, Linx was not entitled "to bring any cross-claim" against KCC in the Local Court proceedings.
5. A review of the pleadings establishes that no formal cross-claim was brought by Linx in the Local Court proceedings. KCC's submission was, however, in effect that the question of whether an impermissible cross-claim was actually being advanced should be determined on the basis of the substance of Linx's claims and not the strict form, and a "cross‑claim" in s 15(4)(b)(i) should be taken to refer to or include a cause of action for which relief could be given in a separate proceeding.
6. In this regard, KCC noted that Linx's written submissions before the Local Court included, at par 20, language such as "providing [KCC] with a windfall gain" and "[KCC] pressing an entitlement to be paid the sum of $36,268.10 that it never originally intended to retain, but would now (unjustly) retain". This was said to amount to Linx advancing a cause of action for unjust enrichment, for example by way of a claim for money paid under principles such as those discussed by the High Court in Lumbers v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635; [2008] HCA 27 (Lumbers) at [79] and [80]. It was also submitted that, even if such a cross-claim were not prohibited, it would fail in the present case because the bare fact of conferral of a benefit, as occurred as result of Linx paying Civilcast without KCC's agreement and not on KCC's behalf, was not sufficient to establish a right of recovery: Lumbers at [80].
7. In my view, KCC's contention that Linx's reliance on the payment of $30,083.35 by Linx to Civilcast amounted to bringing a cross-claim within s 15(4)(b)(i) of the SOP Act, and was thus prohibited, should not be accepted.
8. Section 15(4)(b)(i) concerns the bringing of a "cross-claim". A cross-claim is a procedural device available under Pt 9 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR). It is a means by which a party in proceedings can make a claim for relief against the plaintiff, a defendant or a third party to the proceedings, separate from the relief claimed by the plaintiff or another defendant. Under UCPR r 9.1(2) and (3), a cross-claim is to be made by statement of cross-claim or cross-summons which must comply with the rules that apply to a statement of claim or summons, respectively. The rules and forms relating to statements of claims or summons require, in each case, that the claimant specify the relief claimed. Thus, it is inherent in the concept of a cross-claim that the cross-claimant claims some form of relief, based on an articulated cause of action or other right or equity, independent from or in addition to the relief claimed by the plaintiff in the originating process. This is illustrated by the fact that a cross-claim may be prosecuted separately from the claim in the originating process and vice versa, even if judgment has been entered in relation to the other claim or the other claim has been stayed, dismissed, withdrawn or discontinued, pursuant to UCPR r 9.10. Contrary to KCC's submission, a cause of action for which relief could be given in a separate proceeding does not constitute a "cross-claim". While a cause of action may provide a foundation for a cross-claim, there is no actual cross-claim unless a claim for relief separate from that sought by the plaintiff or another defendant is made.
9. Despite the language of Linx's written submissions to which KCC drew attention as referred to above, those submissions also stated, at par 21, "[t]here is no cross-claim, or offsetting claim being advanced. The contention advanced by [Linx] is merely a factual contention going towards what level of debt (if any) is outstanding under the May Payment Claim".
10. The payment of $30,083.35 by Linx to Civilcast was not, in the way Linx's case was advanced at the Local Court hearing, relied on as giving rise to any claim for independent or additional relief against KCC which Linx sought to have determined by the Local Court. This was confirmed by the fact that it was expressly accepted in Linx's submissions that if such a cross-claim were propounded by Linx, it could not be brought, by virtue of s 15(4)(b)(i), and would be required to be dismissed. In fact, the payment was expressly stated to be relied upon only as "a factual contention going towards what level of debt (if any) is outstanding under the May Payment Claim". The "level of debt … outstanding" was clearly a reference to "the unpaid portion of the claimed amount" which was the only amount that KCC was entitled to recover under s 15(2)(a)(i) of the SOP Act and was a factual matter which KCC bore the legal onus of proving.
11. Put another way, even if a cause of action for which relief could be given in a separate proceeding could amount to a "cross-claim" as KCC contended, Linx did not "bring" any such cross-claim in the Local Court proceedings as it did not assert a right to relief that could be given in a separate proceeding as the basis for reducing the amount of any judgment against it. Rather, the contention was that as a factual matter the amount paid by Linx to Civilcast reduced the "unpaid portion of the claimed amount" as Mr Kennedy's evidence established.
12. Given the way Linx conducted its case at the hearing and the evidence, in my view, Linx's reliance on the payment of $30,083.35 by Linx to Civilcast did not fall within the statutory description of "bring[ing] any cross-claim". Consequently, Linx's reliance on the payment in the Local Court proceedings was not prohibited by virtue of s 15(4)(b)(i) of the SOP Act.
13. For these reasons, the learned Magistrate in the Local Court did not err by finding that Linx's payment of $30,083.35 to Civilcast was not a cross-claim within the meaning of s 15(4)(b)(i) of the SOP Act. Thus, ground (a) relied upon by KCC should be rejected.

Whether such payment by Linx to Civilcast must be taken into account in determining the "unpaid portion of the claimed amount" for the purposes of s 15(2)(a)(i)?

1. In relation to ground (b), the question of law said to be raised was whether a payment such as that by Linx to Civilcast must be taken into account in determining the "unpaid portion of the claimed amount" in section 15(2)(a)(i) of the SOP Act? As adumbrated in ground (b) itself, KCC's fundamental submission was that "such payment [by Linx] to a third party [Civilcast] was not a payment 'to the claimant' within the meaning of s 14 of the [SOP] Act" and thus was not a payment that reduced the "unpaid portion of the claimed amount".
2. Mr Corsaro SC submitted that the question raised in respect of ground (b) was either a question of fact or a question of mixed fact and law and not a question of law. Consequently, he contended that the question sought to be raised by KCC could not be the subject of this appeal under s 39 of the Local Court Act.
3. As noted above, although s 39 of the Local Court Act confines an appeal to this Court to an appeal "only on a question of law", there is no satisfactory test of universal application available to define a question of law. Nonetheless, it is well established by high authority that: 1. whether facts fully found fall within the provisions of a statutory enactment properly construed is a question of law: Hope v Bathurst City Council (1980) 144 CLR 1 (Hope) at 7 (Mason J); [1980] HCA 16; Collector of Customs v AGFA-Gevaert Ltd (1996) 186 CLR 389 (AGFA-Gevaert) at 395 (Brennan CJ, Dawson, Toohey, Gaudron and McHugh JJ); [1996] HCA 36; but 1. when a statute uses words according to their ordinary meaning and it is reasonably open to hold that the facts of the case fall within those words, the question as to whether they do or do not is one of fact: Hope at 8; AGFA-Gevaert at 395. An example was given in Hope of a statute that gave rise to the question whether certain behaviour was within the statutory description "insulting" and, since it was not unreasonable to find that the behaviour met that description, it was said that the question was a question of fact.
4. In the present case, the words "unpaid portion of the claimed amount" are not specifically defined and there is nothing to suggest that they are used other than in their ordinary meaning. In addition, the learned Magistrate in substance found "simply as a factual determination" that the "unpaid portion" was reduced by $30,083.35 as a result of Linx's payment to Civilcast.
5. This finding was based on the evidence of Mr Kennedy, which most relevantly included: "Q. The amount of those invoices [from Civilcast totalling $36,268.10] would have been incorporated into your May payment claim, wouldn't they? A. Correct. Q. So, it's the case that if those payments, if that debt was satisfied, your payment claim would be reduced, you'd no longer claim the [total of $147,879.17], correct? A. Correct."
6. Mr Kennedy's evidence was accepted in relation to both issues in the proceedings. As to the first issue concerning the alleged conversation with Mr Kennedy, his Honour found that "[i]n terms of the observations I made of the witnesses in the witness box, the evidence of Mr Kennedy was relatively straight forward, concise and consistent" and his evidence was accepted in preference to that of the other witness. As to the second issue, the relevant findings were: "When consideration is given to the evidence of Mr Kennedy regarding two invoices forming part of the May payment claim, and the extent to which it would be reduced, and the fact of the $36,268.10 was to be paid to Civilcast, I am of the view that … [whether the payment of $30,083.35 reduced the "unpaid portion"] is simply a factual determination that is required to be made about the level of debt outstanding under the May payment claim …. In that respect, … [KCC] should not be entitled to paid an amount that it never originally intended to retain. It is not dissimilar to the payment of $52,800 made by [Linx to [Veljohn Pty Ltd], which has also been taken into account in reducing the May] payment claim. The amount claimed by [KCC] should be reduced … by the compromised amount of $30,083.35."
7. The fact that the parties accepted in the Local Court that a payment by Linx to Veljohn Pty Ltd, and not to KCC, reduced the "unpaid portion" of the claimed amount, confirmed the Magistrate in his view that a similar payment to Civilcast, and not to KCC, also reduced the "unpaid portion" as a matter of fact.
8. In these circumstances, it was not unreasonable for the Magistrate to find that the "unpaid portion" of the claimed amount was reduced by the amount of $30,083.35 paid by Linx to Civilcast.
9. Therefore, in accordance with the principles set out above, the question of whether the payment $30,083.35 paid by Linx to Civilcast should be taken into account to reduce the "unpaid portion" of the claimed amount was a question of fact and thus could not be the subject of an appeal under s 39 of the Local Court Act. On this basis, ground (b) should be rejected.
10. Furthermore and in any event, in my view, ground (b) should be rejected even if the question whether, on the facts as fully found, the payment by Linx to Civilcast must be taken into account in determining the "unpaid portion of the claimed amount" referred to in s 15(2)(a)(i) of the SOP Act raised a question of law and could be dealt with in this appeal. The Magistrate found, based on Mr Kennedy's evidence and all the circumstances, that the payment of $30,083.35 did as a matter of fact reduce the amount outstanding under the May payment claim. Given that finding, it followed that such a payment was to be taken into account when determining the "unpaid portion of the claimed amount" and there was no error of law on the part of the Magistrate in doing so.
11. Finally, in my view, the contention that "such payment [by Linx] to a third party [Civilcast] was not a payment 'to the claimant' within the meaning of s 14 of the [SOP] Act", and thus was not a payment that reduced the "unpaid portion of the claimed amount", should not be accepted. Under s 14(4), in the circumstances set out in pars (a) and (b) of that subsection, the respondent to a payment claim becomes liable to pay the claimed amount "to the claimant". Under s 15, if the respondent is so liable and fails to pay "the whole or any part of the claimed amount on or before the due date for the progress payment", the claimant is entitled to recover, under s 15(2)(a)(i), only "the unpaid portion of the claimed amount from the respondent". What the "unpaid portion" actually is, in any particular case, is either a question of fact or a question of mixed fact and law. In light of Mr Kennedy's evidence, it was open to the Magistrate to find that Linx's payment to Civilcast reduced the "unpaid portion" even though the amount had not been paid to KCC. Moreover, to accept the proposition that a payment to a third party could not reduce the "unpaid portion" would be inconsistent with the way in which the proceedings were conducted before the Magistrate, where it was accepted that another payment by Linx to a third party, Veljohn Pty Ltd and not to KCC, did reduce the "unpaid portion".
12. For all of these reasons, I reject ground (b).

Conclusion and orders

1. KCC has been unsuccessful in respect of both of the substantive grounds, (a) and (b).
2. As to ground (c), it was accepted during oral submissions in effect that reliance on a payment which reduced the "unpaid portion" did not amount to "raising any defence in relation to matters arising under the construction contract", which would be prohibited under s 15(4)(b)(ii). Otherwise, ground (c) was not pressed as raising a separate question of law.
3. As noted above, ground (d) effectively raised only an error which would have been established if ground (a) or (b) had been made out.
4. As none of the grounds was made out, the plaintiff's summons should be dismissed.
5. The defendant sought costs, if it was successful. No circumstances were raised by the parties and there did not appear to me to be any circumstances, which would justify an approach to costs other than that costs should follow the event.
6. Accordingly, the orders of the Court are: 1. The plaintiff's summons filed on 19 October 2023 is dismissed. 2. The plaintiff is to pay the defendant's costs.

Endnotes

1. Tcpt, 19 March 2024, p 6(47)-(49).
2. Tcpt, 19 March 2024, p 7(8)-(13).

Amendments 11 April 2024 - Certification removed. 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: 21 August 2024