Plaintiff v Defendant

CORPORATIONS - Use of statutory demands in complex construction disputes discussed - Whether court should embark on construing complex contractual provisions, investigate contested legal issues and determine questions of law in application under s 459G.

CORPORATIONS - Whether plaintiff prevented from agitating alleged offsetting claims by operation of Graywinter principle - Defendant contended the claims were not sustainable and not raised in supporting affidavit - A finding that claims for defects were fairly notified in plaintiff's 21 day affidavit - Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq) [2015] VSC 330 applied.

CORPORATIONS - Statutory demand procedure considered not to be the appropriate mechanism to determine defendant's contentions that plaintiff's claims were not sustainable - Offsetting claim found to be genuine, arguable and substantiated and giving rise to arguable and triable issues - Statutory demand not the appropriate mechanism to determine defendant's contentions that claims were not sustainable - Statutory demand set aside.

1 By an originating process filed 20 June 2019, the plaintiff, 133 Walsh Street Pty Ltd ('Walsh Street') makes application under s 459G of the Corporations Act 2001 (Cth) ('the Act') to set aside a statutory demand dated 14 June 2019 ('the Demand') served on it by the defendant, BMF Pty Ltd ('BMF').

2 The Demand was accompanied by an affidavit of the director of BMF, Ian David Wright, sworn 14 June 2019 which is in compliance with s 459E(3) of the Act. The application has been made within the time prescribed by s 459G(2) of the Act.

3 The Demand claims that Walsh Street is indebted to BMF for $1,105,124.04. The schedule to the Demand describes the debt as follows:

1. $1,053,503.93 owed to the creditor pursuant to s 15(4)(b) of the Building and Construction Industry Security of Payment Act 2002 (Vic) (Act) (Unpaid Amounts) in respect of payment claims served on the Debtor Company by the Creditor pursuant to s 14(1) of the Act, as detailed in the table below.
2. 2. $51,620.11 owed to the creditor pursuant to s 12(2) of the Act for interest on the Unpaid Amounts, as detailed in the table below.

The table annexed to the Demand details how the amount claimed is comprised. It states as follows:

• $383,821.90 made on 06/07/18 (unpaid balance of $199,471.17);

• $84,321.60 made on 26/03/2019 (unpaid balance of $115,149.57)

• $125,008.40 made on 18/1/19 (unpaid balance of $307,810.81)

• $28,868.40 made on 25/03/19 (unpaid balance of $278,942.68)

• $257,356.76 made on 01/03/19 (unpaid balance of $685,147.36)

• $20,000.00 made on 04/03/19 (unpaid balance of $665,147.36)

4 Walsh Street relies on four affidavits of Michael David Gibson sworn 20 June 2019 ('Gibson June affidavit'), 16 August 2019 ('Gibson August affidavit'), 18 September 2019 ('Gibson September affidavit'), and 2 October 2019 ('Gibson October affidavit'), together with an affidavit of Paul Woods sworn 7 October 2019. BMF relies on an affidavit of Geoffrey Nathan Robinson sworn 2 September 2019 ('Robinson affidavit').

5 The evidence filed in the proceeding is very substantial for an application of this type, the exhibits numbering several thousand pages, consisting predominantly of reports of independent experts in regard to alleged defects in respect of the works the subject of the Demand.

6 The principles to be applied in considering what constitutes a genuine dispute or offsetting claim in applications to set aside statutory demands are the subject of numerous authorities of state Supreme Courts and the Federal Court of Australia and Courts of Appeal and Full Courts. In the decision of the Court of Appeal in this State of Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq) ('Malec'), the principles applicable in applications to set aside statutory demands were collected and succinctly summarised as follows (citations omitted):[1]

The terms of s 459H of the Corporations Act and the authorities make clear that, on an application to set aside a statutory demand, the applicant is required only to establish a genuine dispute or offsetting claim. The applicant is required to evidence the assertions relevant to the alleged dispute or offsetting claim only to the extent necessary for that primary task. It is not necessary for the applicant to advance a fully evidenced claim. Therefore, the task faced by an applicant is by no means at all a difficult or demanding one.

In determining such an application, it is not necessary or appropriate for a court to engage in an in-depth examination or determination of the merits of the alleged dispute. This is because an application alleging a genuine dispute or offsetting claim is akin to one for an interlocutory injunction and requires the applicant to establish that there is a 'plausible contention requiring investigation' of the existence of either a dispute as to the debt or an offsetting claim. It is therefore not helpful to perceive that one party is more likely than the other to succeed or that the eventual state of the account between the parties is more likely to be one result than another. Further, the determination of the 'ultimate question' of the existence of the debt at a substantive hearing should not be compromised.

The court is required to determine whether the dispute or offsetting claim is 'genuine'. It has been said that the criterion of a 'genuine' dispute requires that the dispute be bona fide and truly exist in fact and that the grounds for alleging the existence of a dispute be real and not spurious, hypothetical, illusory or misconceived. It has also been observed that the dispute or offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion. It must also have sufficient factual particularity to exclude the merely fanciful or futile. A rigorous curial approach is essential to the effective operation of the statutory scheme.

The court is not required to accept uncritically every statement in an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be, as it may not have sufficient prima facie plausibility to merit further investigation as to its truth. The court is also not required to accept uncritically a patently feeble legal argument or an assertion of facts unsupported by evidence, although this should not be read as suggesting that the applicant must formally or comprehensively evidence the basis of its dispute or off-setting claim. Except in such extreme cases, the court should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on by the applicant to set aside a statutory demand.

7 A number of authorities observe that the threshold for an applicant for establishing a genuine dispute or offsetting claim is a low one and by no means difficult or demanding.[2] In Rohalo Pharmaceutical Pty Ltd v R P Scherer SpA & Pharmagel SpA,[3] Lindgren J observed that in a summary judgment application a creditor would not be entitled to judgment if a defendant company raised a defence or cross‑claim which warranted a trial and, similarly, a defence or cross‑claim would not be struck out or dismissed if it raised an issue deserving of a trial. In the same way, an application to set aside a statutory demand, which is a summary procedure designed to assess whether there should be a 'presumption of insolvency', is no less draconian than the summary curial remedy of a judgment for debt.[4] Lindgren J in adopting the analogy of summary judgment, observed that when applying to set aside a statutory demand the task confronting a company of establishing the 'genuineness of a dispute or offsetting claim is no more onerous than that which it would confront if it were seeking to meet an application brought by the creditor for summary judgment'.[5]

8 In Paneltech Industries (Aust) Pty Ltd v Australian Sky Reach Pty Ltd (No 2),[6] Barrett J observed:

Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The Court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger.[7]

9 In Solarite, Barrett J considered that a company will only fail to have a demand set aside on the genuine dispute ground if it is found that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted.[8]

10 In the context of what is required to establish genuine offsetting claims, in Statutory Demands and Winding up in Insolvency, the author observes that:

In order to establish the existence of a genuine claim, the company must give some indication, and adduce some evidence, in support of the alleged quantum of the offsetting claim so that the court may determine whether there is a genuine offsetting claim of a given amount... simply annexing a statement of claim to an affidavit in support of an application to set aside a statutory demand will not provide sufficient evidence as to quantum.[9]

11 In Macleay Nominees Pty Ltd v Belle Property East Pty Ltd[10] Palmer J stated:

... a genuine offsetting claim for the purposes of CA s 459H(1) and s 459H(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 unliquidated damages for economic loss, the Court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff adduces 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(1) and s 459H(2).[11]

12 In Re Diveva Pty Ltd,[12] Black J collected the relevant authorities on the question of the level of evidence required to establish the quantum of an offsetting claim. His Honour stated at paragraphs 17 to 20:

1. Several cases have addressed the extent of evidence which is required to establish an offsetting claim, an issue which squarely arose in this application. In Zenaust Imports Pty Ltd v Alembic Chemicals Works Co Ltd (1998) 28 ACSR 465, in circumstances where a creditor's statutory demand provided limited detail, Santow J held that an affidavit which went little further than an assertion that the creditor was indebted to the plaintiff on a balance of account was sufficient [sic] to establish a genuine offsetting claim. That case is distinguishable from this case, where PBM provided detailed information to support the Demand in Mr Cornish's affidavits.[13]
2. In Stone Group Asia Pacific Investments v Johnston Taylor Corporate Ltd [1999] NSWSC 127 at [16], Master Macready observed that, in order to determine the amount of an offsetting claim: "[T]he Court has to have some evidence on which it can base its decision. This is because the section requires it to determine the admitted amount after determining the amount of the offsetting claim." In Lynch Management Group Pty Ltd v S.R. Electronics Co Pty Ltd [2001] NSWSC 39, Master Macready took into account a claim for loss of profits, in finding that an offsetting claim was established, where sales records led in evidence demonstrated the amount of monthly profit on an average basis.
3. In Crontec Automotive Tooling v Allsteel [2006] NSWSC 555 at [34], Austin J dealt with a submission that a table setting out total costs to remanufacture certain steel blocks was not sufficient to persuade the Court of the value of the offsetting claim asserted by the table. His Honour noted that:

As far as quantification is concerned, it is unnecessary for the plaintiff to prove on the balance of probabilities either that it has suffered a specific quantified loss or that its loss was caused by the defendant. What is needed is for the plaintiff to show that the quantification of the offsetting claim that it asserts satisfies the test of plausible contention - that is to say, that the claim is not fictitious and that there is a real basis for the asserted calculation. ... It is not necessary for the plaintiff to produce external corroboration of estimates, but the Court is unlikely to be satisfied that the standard has been reached if the plaintiff does no more than make an assertion of the amount of the offsetting claim, without providing any specific or particularised calculations to show how the final figure was reached.

His Honour there held that the relevant table satisfied the requirements for establishing an offsetting claim, notwithstanding that there was no external corroboration for them. His Honour again referred to that approach in LSI Australia Pty Ltd v LSI Holdings Ltd [2007] NSWSC 1406; (2007) 25 ACLC 1602 at [22], in holding that the evidence in that case fell "well short of what would be needed, in terms of particularity of valuation, to make out a case for a genuine offsetting claim under s 459H".

1. In Diploma Constructions (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91 at [90], Pullin JA (with whom Newnes and Murphy JJA agreed) referred to Royal Premier Pty Ltd v Taleski above in identifying the test to be applied in establishing an offsetting claim, and observed (at [78]) that the evidence to support an offsetting claim need only be sufficient for the court to make 'an estimate of the amount of the offsetting claim' in monetary terms. That decision was in turn cited for that proposition, with approval, in Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 3) above at [81].[14]

13 In the context of building and construction disputes where there are honestly held views on either side that there is a genuine dispute,[15] the approach has been taken that it is more appropriate for the dispute to be litigated by way of conventional trial.

14 In this context, reference was made in this case by counsel for Walsh Street, Mr Fary, to the decision of Club Marconi of Bossley Park v AVR Services NSW Pty Ltd ('Club Marconi')[16] as to the use of statutory demands in construction cases. Club Marconi was an application to set aside a statutory demand making claims under a complex building and construction contract involving extensive building works. In that case, the value of the contract was in excess of $8 million. Palmer J observed that:

This case has all of the hallmarks of a classic building and construction dispute. The contract was complex; the building works to be carried out were extensive; the value of the contract was somewhat in excess of $8 million. The parties have exchanged correspondence through their solicitors which has set out their competing contentions. In those circumstances, it is particularly difficult for a creditor to claim successfully that there is no genuine dispute sufficient to warrant the setting aside of a Statutory Demand.

A number of authorities show that the threshold that an alleged debtor has to cross in establishing the genuineness of a dispute for the purposes of s459H is a low one. I would refer in this regard to the decision of Barrett J in Process Machinery Australia Pty Ltd v ACN 057 260 590[17], in which his Honour collects many of the cases dealing with the question. His Honour refers to a submission that a Court should, in the case of a complex building contract, take at face value the fact that there is a clear difference of opinion between the parties which should be resolved in an appropriate way before a Court can safely allow non-compliance with a Statutory Demand to operate to provide prima facie grounds for the making of a winding-up order. His Honour expressed himself as having considerable sympathy with that view.

In that regard, Barrett J referred to what was said by Young J, as the Chief Judge in Equity then was, in John Holland Construction and Engineering Pty Ltd v Kilpatrick Green Pty Ltd.[18] In that case Young J, referring to a dispute arising under a building contract, said at 254:

It may be that it is far more appropriate in the instant sort of case for the court to just take a broad brush approach. Thus the court might just say that because this is not a debt collecting court, where there is a construction case of this nature, the demand should be set aside under s459J(1)(b) whenever it can be seen from the correspondence that there are honestly held views on either side which have brought a dispute between the parties. Thus, the matter can be dealt with in the ordinary way in which construction disputes are dealt with without the time and expense that is involved in running this sort of litigation ahead of that dispute.

With respect, I agree with the views of Young CJ in Eq and Barrett J as to this general approach to disputes arising under building contracts. It accords with what I have described as a low threshold which an alleged debtor has to cross in order to satisfy the Court that there is a genuine dispute: see eg per Hayne J in Mibor Investments Pty Ltd v Commonwealth Bank of Australia,[19] and per McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd.[20] The Federal Court applies the same essential standard. For example, in Rohalo Pharmaceuticals Pty Ltd v R P Scherer SpA & Pharmagel SpA,[21] Lindgren J regards the standard to be met in demonstrating a genuine dispute as no more onerous than that which a debtor would confront if it were seeking to meet an application by the creditor for summary judgment.

I do not suggest that there can be no dispute arising under a construction or building contract which does not surmount that low threshold. There obviously will be cases in which the Court can see clearly and without a protracted enquiry that a contention by a debtor that there is a genuine dispute under a building contract is unfounded. Such a case was W & F Lechner Pty Ltd v Drummond & Rosen Pty Ltd.[22]

However, this case is one in which there is, at the very least, a serious question to be tried as to what was agreed between the parties on 31 August 2001 and as to whether or not that agreement had any effect upon the building contract or was merely a temporary arrangement pending resolution of disputes, in order to afford the Defendant some financial relief. There is a serious question as to whether the amount referred to in the agreement was inclusive of GST or exclusive of GST. There is a serious question as to what is the cost of any rectification works for which the Defendant may be liable.[23]

15 In applications to set aside statutory demands which involve complex contractual documents that will require the Court to construe the contract or a relevant statutory provision or investigate contested legal issues, the approach which has been taken in the authorities is that the Court will generally not determine such issues in an application to set aside a statutory demand. An example of this approach is to be found in Trecomax Pty Ltd v Prentice,[24] where Sackville J stated:

In Spencer Constructions, the Full Court thought (at FCR 463; ALR 454; ACSR 363) it clear from the authorities that:

'... in considering applications to set aside a statutory demand, a court will not determine contested issues of fact or law which have a significant or substantial basis.' [Emphasis added]

This suggests that the court should not investigate contested legal issues, beyond determining whether the argument has a "significant or substantial basis".

There are authorities which support the proposition that if the facts are not in dispute, the court can decide the question of law. Thus in Delnorth v State Bank of New South Wales (1995) 17 ACSR 379 (SC(NSW)), Cohen J considered (at 384‑5) that where no further investigations of the facts was required, the court, in an application under s 459G of the Corporations Law could decide, as a matter of law, whether there is a genuine dispute. His Honour thought that the occasions where this is possible might be "few", but he proceeded in that case to resolve the question of law: see, too, Burdon Pty Ltd v Gillford Pty Ltd (unreported, Fed C of A, Full Court, No 1096/95, 1 December 1995), per Hill J, with whom Whitlam J agreed.

While this approach is open, in my view the court should take care to ensure that it does not go beyond the role that is appropriate, having regard to the considerations identified by Hayne J in Mibor Investments and the approach endorsed by the Full Court in Spencer Constructions. The procedure established by Div 3 of Pt 5.4 of the Corporations Act is not ordinarily the occasion for final resolution of a dispute, even if the matter in contest rests on a question of law...[25]

16 This position was upheld by the New South Wales Court of Appeal in Infratel Networks Pty Ltd v Grundy's Telco & Rigging Pty Ltd[26] where it was stated:

The primary judge said (at [24]) that where the relevant dispute depends upon the construction of the relevant contract, the court will ordinarily determine that question on an application to set aside the statutory demand where the factual matrix for the determination is present and there has been sufficient time to make proper submissions as to the question. His Honour cited Delnorth Pty Ltd v State Bank of NSW (1995) 17 ACSR 379 at 384 per Cohen J and Re Seduce Group Australia Pty Ltd [2011] NSWSC 290 at [27] (Seduce) and following per Ward J.

With respect, the primary judge has to a degree misstated the principle. The court may determine questions of construction of a contract in an appropriate case. However, this is not, as his Honour said, the "ordinary" situation, it is what may occur on a few occasions: Seduce at [28] and see Trecomax Pty Ltd v Prentice (2004) 50 ACSR 314; [2004] FCA 1057 at [35] where Sackville J actually said it was not ordinarily the occasion for the court to construe the contract.[27]

17 It may be that in certain cases where the question of construction is a simple one and where there are no factual issues to be resolved, the relevant Court may construe the contract. For example, in Lodge Partners Pty Ltd v Pegum,[28] a case which concerned the construction of a document in the context of a genuine dispute, Lindgren J observed:

...where the dispute relates to a simple question of construction that can be decided following a short hearing and there is no factual issue to be resolved, the Court will decide the question and if construction is against the company the dispute will not be classified as 'genuine'...[29]

18 However, this position is not the 'ordinary' position. In Hobash Holdings Pty Ltd, Black J cited the decision in Infratel, stating that 'The Court will not generally determine questions of construction of a contract in an application to set aside a statutory demand, although it may do so rarely and in an appropriate case'.[30]

19 In his oral submissions, Mr Craig contended that certain offsetting claims which Walsh Street sought to agitate were not 'raised' in the Gibson June affidavit, the 21 day affidavit, and were not able to now be raised on an application of what has become known as the Graywinter principle which is derived from the observations in the reasons for decision of Sundberg J in Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund.[31] It is appropriate to survey the approach to the application of the principle which has emerged from the authorities.

20 In Hansmar Investments Pty Ltd v Perpetual Trustee Co Limited, White J of the Supreme Court of New South Wales expressed the view that the grounds of the application to set aside the demand must be raised by the supporting affidavit and whether they are raised expressly, or by necessary inference, or by a reasonably available inference, provided they are raised, the requirements of s 459G will be satisfied.[32]

21 In POS Media Online Limited v B Family Pty Ltd, Austin J of the Supreme Court of New South Wales stated that if a relevant document (such as an agreement) was annexed to the affidavit in support of the application, a ground obvious on the face of the document would be 'raised' even though it is not mentioned or suggested in the text of the affidavit.[33]

22 In Callite Pty Ltd v Adams,[34] Santow J considered an application to set aside a statutory demand served on a company by its former solicitors for legal fees. The basis of the application was that there had been failure to comply with the relevant legislative requirements regarding disclosure of legal costs. The affidavit in support attached the relevant invoices but the affidavit in support itself said nothing about this ground. Santow J held that it was obvious from a review of the attached invoices that they lacked the prescribed statutory formulations and this provided a sufficient basis to enable legal conclusions to be drawn.

23 In Saferack Pty Ltd v Marketing Heads Australia Pty Ltd,[35] Barrett J, as he then was, agreed with the analysis of White J in Hansmar Investments and concluded that in an earlier decision of his in Process Machinery Australia Pty Ltd v ACN 057 260 590 Pty Ltd,[36] he was too strict in his approach.[37] Barrett J also agreed with the observations made by the Full Court of the Supreme Court of Western Australia in Meadowfield Pty Ltd v Gold Coast Holdings Pty Ltd[38] which held that a supporting affidavit is required to 'reveal' the ground relied upon to set aside the statutory demand. Barrett J considered that a ground is 'raised ... if the ground is evident from the supporting affidavit, even if only because it can be discerned from some annexed documents, the content of which "reveals" it.'[39]

24 In Canon Australia Pty Ltd v Yong Bros Pty Ltd,[40] Brereton J stated:

In my opinion, the supporting affidavit required by the Corporations Act s 459G(3), is sufficient if it contains or annexes evidence from which the ground relied upon to impugn the demand can be made good. ...

Where the grounds depend on arguments based on the face of a document, it must be sufficient that the affidavit annexes the relevant document or documents. In this view I am fortified by the observations of Austin J in POS Medial Online Ltd v B Family Pty Ltd; ... of White J in Hansmar Investments Pty Ltd v Perpetual Trustee Co Limited and of Barrett J in Saferack Pty Ltd v Marketing Heads Australia Pty Ltd ...[41]

25 In NA Investment Holdings Pty Ltd v Perpetual Nominees Limited,[42] the New South Wales Court of Appeal considered circumstances where the affidavit in support attached a facility agreement upon which the debtor company wished to advance a particular construction. Neither the body of the affidavit nor any exhibit to it made reference to the construction for which the debtor company contended. Lindgren AJA stated:

I accept that there was nothing in the affidavit of exhibits to alert [the creditor] to the particular construction to be advanced by the Company. Indeed, the affidavit was directed to an offsetting claim and was therefore apt to put [the creditor] 'off the scent'. None the less, as noted above, the very clause on which the statutory demand depended contained the limitation of liability subclause.

In my respectful opinion, [the creditor's] submission confuses the concept of 'support' with natural justice considerations which will attend the court's hearing and determination of the application to set aside. Whatever may be the outer limits of the concept of 'supporting' in s 459G(3), in my view the requirement is met where, as here, the only issue sought to be raised by the company is one of construction within the four corners of the provision on which the statutory demand depends, and the document in question, albeit with other documents, is put into evidence by the affidavit filed and served within the 21 day period.[43]

26 The Court of Appeal in this State has had occasion to give consideration to the application of the Graywinter principle. In Malec[44] the Court appears to have adopted the requirement of the provision of 'fair notice' to the respondent in the supporting affidavit. In that case, the respondent had supplied fuel to the applicant on a running account for over four years and ultimately served the applicant with a statutory demand for unpaid amounts owed for fuel. The applicant's supporting affidavit to set aside the demand alleged that the respondent overcharged the applicant on a very specific ground and precisely quantified the alleged offsetting claim. After expiration of the 21 day period prescribed by s 459G of the Act, the applicant filed an affidavit alleging overcharging on a different ground and for a larger amount. The question of the Graywinter principle was engaged in the context of whether the applicant could raise the dispute in respect of the overcharging on the different ground raised after the 21 days had elapsed. After a consideration of a number of authorities dealing with the application of the principle, the Court concluded its analysis by referring to the decision in Re Australia Zhongfu Oil Gas Resources Pty Ltd ('Zhongfu'),[45] in which Brereton J reviewed and discussed the judgments of Barrett J in Elm Financial Services Pty Ltd v MacDougal[46] and Saferack[47] and the judgment of Campbell J in Tuta Health Care Pty Ltd v Nipa Asia Pty Ltd.[48] In Zhongfu Brereton J observed:

[I]t will be sufficient if the material facts on which the applicant intends to rely to support the genuine dispute are discernible from the supporting affidavit and/or the annexures and exhibits to it. Nonetheless, while explicit reference to the ground or necessary implication may not be necessary, it remains important that the affidavit convey some fair notice to the [respondent] of the case that is to be made.[49]

27 In concluding that the applicant in Malec was not permitted to raise the offsetting claim mentioned in the second affidavit, the Court appears to have adopted the requirement to 'convey some fair notice' to the person that served the demand by concluding that:

...there was nothing in the First Affidavit that was capable of conveying to [the respondent] that [the applicant] would seek to raise a genuine dispute or an offsetting claim based on the fuel decanted from the tankard by [the applicant's] drivers as distinct from a genuine dispute or an offsetting claim based on the impossibility of [the respondent's] drivers having filled the tankard by more than its safe fill capacity on any particular day.[50]

28 In Malec, the Court of Appeal also held that 'the Graywinter principle is not satisfied simply because the ground relied upon in the supporting affidavit and the ground sought to be raised in an affidavit filed after the expiration of the 21 day period deal with the same broad issue'.[51] In Malec, the Court of Appeal held that the applicant had 'confined the area of controversy to the overfilling ground in respect of specified instances and limited its offsetting claim to the amount of $415,063'.[52] The applicant's 'general allegations were made in the context of, and in support of, a very specific ground for raising a genuine dispute or an offsetting claim, namely, the 'overfilling' ground'.[53]

29 In GoConnect Ltd v Sino Strategic International Ltd (In Liq)[54] ('GoConnect'), the Court of Appeal again had occasion to consider the application of the Graywinter principle. In GoConnect in its 21 day affidavit the applicant raised a dispute that the loan money which was allegedly owed pursuant to the demand was not repayable as the applicant had a discretion when to repay. The applicant later sought to raise an argument after the prescribed 21 day period that the loan facility agreement contained oral terms or that the conduct of the parties with respect to the agreement gave rise to an estoppel binding upon the respondent that would prevent it from enforcing the loan facility agreement. In concluding that this argument was not properly raised, the Court of Appeal stated that (citations omitted):

....The supporting affidavit must 'fairly alert' the respondent to the nature of the case made in support of the application to set aside the statutory demand. It 'must fairly notify the respondent of the evidentiary basis for a submission that the statutory demand should be set aside on the particular ground upon which the applicant seeks to rely'. It will be sufficient if the material facts on which the applicant intends to rely to support the genuine dispute are 'discernible from the supporting affidavit and/or the annexures and exhibits to it'.

GoConnect's contention that the loan money was not repayable as it had a discretion when to repay was fairly notified in the Wong [21 day] affidavit. However, no other contention was notified.

It is true that Wong exhibited the Basedow affidavit to his affidavit. GoConnect says that the additional contentions that it now wishes to advance can be seen in the correspondence exhibited to that affidavit. We disagree. That correspondence is innocent of any material that would have put Sino on notice of these additional contentions. In his letter to Basedow dated 21 July 2015, Li said: [extract edited]

Also, we refer you to Clause 6 of the Loan Facility Agreement dated 20 October 2003...

To date, repayments of the loan have only been made at the discretion of GCN board of directors, rather than on demand by SSI. The agreement has been operated by both companies in this manner since inception...

In our opinion, this letter does no more than state the effect of clause 6 and the way it has been implemented. It does not fairly give notice that GoConnect contends that the loan facility agreement contained oral terms or that the conduct of the parties with respect to the agreement gives rise to an estoppel binding upon Sino that would prevent it from enforcing it.

Even if we are wrong about this, the correspondence must be read in the context of the contents of the Wong affidavit. As set out at [13] to [14] above, that affidavit explicitly confines the basis of the genuine dispute to the terms of the loan facility agreement.[55]

30 When applying the Graywinter principle, Courts regard grounds are being 'raised' when they are evident on the face of a document annexed to an affidavit even if not referenced in the affidavit itself. Nonetheless, the Court of Appeal in this state considers that the 21 day affidavit is required to provide 'fair notice' or to 'fairly alert' the opposing party to the grounds on which the an applicant to set aside a statutory demand relies. The test of 'fair notice' to the defendant by way of the 21 day affidavit prevents an applicant from changing its position if it seeks to raise a new claim which was not evident or available from inference in the 21 day affidavit or its exhibits.

31 An applicant to set aside a statutory demand will not infringe the Graywinter principle if it fairly alerts or gives fair notice to the creditor of the nature of the dispute or offsetting claim (or 'some other reason under s 459J') which it ultimately seeks to agitate in the application in its 21 day affidavit. The applicant may supplement the evidence in relation to such a ground but if such supplementary evidence is not referable to a ground of which fair notice was given in the 21 day affidavit, the Graywinter principle will be infringed and that dispute or claim or 'some other reason' will not be permitted to be agitated in the application. The question as to whether the principle is infringed will involve an analysis of the evidence which is filed and require an assessment of the character of the ground which the respondent creditor contends offends the Graywinter principle. If, on an objective analysis, such an exercise results in a conclusion that what is sought to be agitated departs from what was raised in the 21 day affidavit, that ground will not be permitted to be agitated in the application.

32 The Demand arises from a construction project for four residential units and related common property at 133 Walsh Street, South Yarra. Walsh Street is a company established to develop the project, BMF is the builder for the project. The land is owned by third parties.

33 By a contract dated 20 April 2016, ('the Contract') Walsh Street engaged BMF to carry out the design and construction work ('the works'). The Contract provided for a lump sum price of $11,481,318.00, excluding GST. The Contract consisted of a two volume document titled '133 Walsh Street, South Yarra Construction Contract (with design)', general conditions of contract amended from AS2124-1992 ('GCs') and annexures titled Parts A to P.[56] The Contract required Walsh Street to appoint a Superintendent whose responsibility was, amongst other things, to give instructions to BMF and to assess payment claims. At all relevant times, Property Development Solutions Pty Ltd ('the Superintendent') acted as the superintendent.

34 It will be seen from the table annexed to the Demand which is set out in paragraph 3 above, the Demand made claims in respect of three progress claims made by BMF for the project:

(i) progress claim 22, dated 30 May 2018 (PC22);

(ii) progress claim 28, dated 27 November 2018 (PC28); and

(iii) progress claim 29, dated 15 January 2019 (PC29).

35 After the filing of the evidence in the proceeding and the preparation of the initial written submissions, there were developments which, to some degree, diminished the complexity of matters which required consideration in the proceeding. These were the subject of oral submissions and concessions at the hearing of the application.

36 Mr Fary of counsel, who appeared on behalf of Walsh Street, conceded, for the purpose of this proceeding only, that PC29 was a valid payment claim for the purposes of the Building and Construction Industry Security of Payment Act 2002 (Vic) ('SOP Act').

37 Mr Craig of counsel, who appeared on behalf of BMF, in turn conceded, again for the purposes of this proceeding only, that PC22 and PC28 were not valid payment claims under the SOP Act. This concession arose as a consequence of the decision of Digby J in MKA Bowen v Carelli Constructions,[57] in which his Honour determined that a payment claim could not be issued prior to a 'reference date' within the meaning of that expression as it is defined by s 9(2) of the SOP Act.[58] Mr Craig accepted that, having regard to Digby J's judgment, there is, for the purposes of this proceeding, a genuine dispute in relation to those two progress claims.

38 PC29, which was accepted by Walsh Street for the purposes of this proceeding as being a valid progress claim for the sum of $678,741.42, was therefore the only progress claim which could be pressed by BMF in the proceeding.

39 In Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd ('Grandview'),[59] the Court of Appeal in New South Wales considered the operation of the New South Wales SOP Act in the context of a builder having served a statutory demand for two progress claims. The Court of Appeal agreed with the primary judge's acceptance of the correctness of prior authorities concerning the inability of a party to raise a genuine dispute in relation to a judgment debt obtained under the SOP Act. The Court of Appeal also agreed that the position in this regard applied to a statutory debt arising by operation of the SOP Act from a payment claim being accepted or not being challenged within the period prescribed by the SOP Act.[60] In this application, the concession by Walsh Street that PC29 is a valid payment claim under the SOP Act meant that it could not contend that there is a genuine dispute in respect of that claim.

40 Significantly, in the present context, the Court of Appeal in Grandview observed however that offsetting claims can be raised against such judgment or statutory debts in the context of applications to set aside statutory demands, stating:[61]

The principles associated with Douglas and Diploma and applied by the primary judge do not, however, prevent a party in receipt of a statutory demand based on either a judgment obtained or an accepted or unchallenged claim under the SOP Act from raising offsetting claims: see Douglas at [93]; see also Re J Group Constructions Pty Ltd [2015] NSWSC 1607; 303 FLR 139. An offsetting claim is one that is defined in s 459H(5) of the Corporations Act as meaning:

a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).

41 Walsh Street contended that it had offsetting claims of an order which would extinguish the debt claimed in PC29. Mr Fary classified the alleged offsetting claims into six categories, designated A through to F.

42 Before turning to each of those offsetting claims, reference should be made at the outset to a payment made under a bank guarantee to Walsh Street by BMF. Walsh Street had been provided with a bank guarantee in its favour by BMF for $287,000.00. In September 2019, it presented the bank guarantee for payment by the bank which issued it, and it was honoured. The effect of the honouring of the bank guarantee was a payment by BMF to Walsh Street of $280,000 and that amount is required to be brought to account in BMF's favour if there are found to be genuine offsetting claims available to Walsh Street. I agree with Mr Fary's submission that the appropriate methodology to adopt in respect of the appropriation of the funds paid under the bank guarantee is first to assess whether there are genuine offsetting claims and if so in what sums, and then to apply the amount of the proceeds of the bank guarantee against that figure.

43 I now turn to consider each of the offsetting claims pressed by Walsh Street. Certain of those claims were also the subject of concessions by both Mr Fary and Mr Craig.

44 This claim is the subject of evidence in Mr Gibson's June and August affidavits. In the Gibson June Affidavit, it was contended that the category gave rise to an offsetting claim of $240,156. In the Gibson August affidavit[62] however Mr Gibson deposes that this ground, rather than constituting an offsetting claim by Walsh Street, may entitle BMF to a progress claim of $53,645.00 plus GST and provides a calculation of how that amount is arrived at.

45 At the hearing of this matter, Mr Fary conceded that this category of claim would result in a credit in that amount to BMF, subject to a contention that, overall, Walsh Street has overpaid BMF. That contention, which was described in submissions as the overpayment claim, was the subject of argument to as to its availability by reason of the application of the Graywinter principle. I shall consider that issue later in these reasons but ultimately I have come to the conclusion that Walsh Street has not raised such a claim in the Gibson June affidavit and it is now not able to do so.

46 This alleged offsetting claim is said to amount to $1,118,830.00. If, on an application of the relevant tests which have been referred to, Walsh Street establishes genuine offsetting claims of this order, it would clearly extinguish the amount which BMF contends remains owing under PC29 (and bringing to account other 'credits' to which it is entitled). The offsetting claim in respect of costs of rectifying defects is the subject of extensive evidence in the June, August and September Gibson affidavits[63] and this claim was the central focus of the parties' submissions in this application. The evidence detailing the alleged defects and the quantum of the costs of rectification is contained in several reports of independent experts engaged by Walsh Street.

47 In the Gibson June affidavit, Mr Gibson deposes that the Superintendent had issued directions under clause 30.3 of the GCs. The exhibits to the affidavit show that the notices were initially under clause 23.1 and later additionally clause 30.3 of the GCs. The notices inform BMF of defects in the works which required rectification with later notices provided deadlines by which BMF was to remedy the defects.[64] From 25 October 2018 to 26 February 2019 there were six such direction notices issued under the heading "Superintendent's Representative's Instruction" and one notice in the form of a letter from the Superintendent. The defects the subject of those notices included those relating to finishing, drainage, referred to a number of defects lists[65] and a 55-page report which identified a variety of defects in plumbing works at the project. Mr Gibson deposes that BMF failed to rectify the defects by the deadlines provided for in the notices and that he informed the Superintendent by a letter dated 12 March 2019 that pursuant to clause 30.5, Walsh Street would 'elect to accept' a list of certain defects in BMF's work. The Superintendent notified BMF of Walsh Street's position in this regard by letter dated 13 March 2019, in which the Superintendent noted that the effect of this election would be a decrease in the value of the works (and therefore effect the amount payable to BMF) by operation of clause 40.5 of the GCs.[66]

48 By a letter of 15 April 2019, the Superintendent issued a notice to BMF in relation to those defects that had not been accepted by Walsh Street. The notice stated that if the defects were not resolved within seven days they would be rectified by other persons and this would be a debt due and payable under clause 30.3 of the GCs.[67]Mr Gibson deposes that BMF did not rectify any of the alleged defects within the time specified. He states that the cost of rectifying the defects was not known at the time that he swore his affidavit and independent consultants had been engaged to provide a report on the defects, their scope and likely cost of rectification and that Walsh Street would seek compensation from BMF which would be a debt due under clause 30.3 of the GCs.

49 Similar notices were issued to BMF by the Superintendent in relation to defects in the 'dual storm water pit pumps, dual sewer pit pumps, and rain water harvester pump system'. This notice was issued on 26 April 2019. Those defects have not been rectified and Mr Gibson states that Walsh Street intends to have those defects rectified by another contractor.

50 He then deposes to substantial defects in the external rendering to the property which were the subject of a notice from the Superintendent on 27 May 2019. This notice was in respect of all remaining defects in the works, including the external rendering. BMF did not rectify the defects the subject of the 27 May 2019 notice and Mr Gibson deposes that Walsh Street also intended to have those defects rectified by another contractor. He states that at the date of swearing his June affidavit he did not have an estimate of the costs which would be incurred by Walsh Street in having the defects rectified, but independent consultants had been retained to provide a report in that regard which included the scope of the rectification works required and the likely cost.

51 In the Gibson August affidavit, Mr Gibson deposes to the engagement of independent expert consultants to provide reports on the defective items set out in the consolidated list of defects provided by the Superintendent as at May 2019, the scope of such rectification works and their cost. Walsh Street obtained an independent expert report of Mr Raymond Martin of 2 August 2019 ('Martin report'), a lengthy report of some 178 pages, in which Mr Martin provides his expert opinion on the cause and extent of the defects identified in the consolidated list, the cause of some additional defects identified by him, the method and scope of works to rectify those defects which is contained in the appendix to his report and the likely cost to rectify those defects. Mr Martin concludes his report by stating 'much of the work carried out in this project has not been carried out in a workmanlike manner and in accordance with the plans and specifications including the tender documents'.[68] Mr Martin was at pains to emphasise that he had no expertise in plumbing matters and as such his assessment of quantum is confined to matters other than rectification of plumbing defects. Based on his proposed scope, the likely cost of rectification of the matters the subject of his report was said to be $793,509.00.[69]

52 Walsh Street also obtained an independent expert report of Mr Anthony Davis of 12 August 2019 ('Davis report'), consisting of a detailed 134 page report. Mr Davis provided an opinion on the cause and extent of certain of the other defects identified in the consolidated list prepared by the Superintendent together with other defects and incomplete works which he identified during his inspections of the property. A description of the method and scope of the works required to rectify those defects is contained in an appendix to the Davis report. Mr Davis concludes his report by stating that there are various defects to the plumbing and drainage works, there has been non-compliance with the Contract and he considers that these are 'likely to result in dangerous and unhealthy conditions, loss of amenity for occupants and undue dampness and deterioration of building elements and therefore require rectification'.[70]

53 Expert reports were also obtained of Mr Mark Newell of Independent Plumbing Inspections dated November 2018, 22 January 2019, 11 February 2019, 1 April 2019, 2 May 2019, 9 May 2019, and 14 May 2019 (which I will refer to as the IPI reports), together with an independent expert report of Mr Peter Slater of 28 December 2018 ('Slater report') in respect of other items identified in the consolidated list. Mr Slater's report was confined to the issue of the stormwater pit pump installation at the project.

54 Mr Gibson said that he did not have an estimate of the costs of alternative accommodation, removal and storage costs if the occupants were required to vacate the premises to which reference has been made, or the costs that would be incurred by Walsh Street in having the defects detailed in the IPI reports and the Slater report rectified by another contractor. An independent consultant had been retained to assess the position in that regard.

55 In the Gibson August Affidavit, Mr Gibson exhibits a summary of claim which was lodged in the Building Property List of the Victorian Civil and Administrative Tribunal on 6 August 2019. In that document, which comprises 213 pages, it is contended that the Superintendent has identified and recorded defects in the works completed by BMF under the Contract. A consolidated list of all defects in the works identified by the Superintendent as at 21 May 2019 is annexed to the summary of claim. The summary of claim concludes with a contention that the defects identified constituted breaches by BMF of the warranties in clause 3.6(b) of the GC and/or breaches of implied warranties given by BMF pursuant to s 8 of the Domestic Building Contracts Act 1995 (Vic) ('DBC Act'). As a result of these breaches it is alleged that Walsh Street has suffered and will continue to suffer loss and damage.

56 In the Gibson September affidavit, Mr Gibson states that there was still no estimate available as to the cost that would be incurred by Walsh Street in having the defects in the external render of the property rectified, but that Walsh Street had engaged two independent consultants to provide a report on those defects, their scope and the cost of rectifying them.

57 Mr Gibson deposed that Walsh Street had obtained an independent expert report of Mr Yeh of Prowse Quantity Surveyors Pty Ltd of 12 September 2019 ('Yeh report'). In that report, Mr Yeh provides his opinion on the likely cost to rectify certain defects based on the scope of works set out in appendix 10 of the Davis report which when regard is had to its substance seems confined to the issues of plumbing at the project. This document is titled 'Rectification of Scope of Works' with headings 'Basement surface drainage', 'Basement inground drainage' and 'Works not completed according to documentation'. The narrative in the annexure describes the scope of works required to be carried out to rectify those categories of defects. In his report, Mr Yeh states his opinion, identified by cross-reference to the numbering in the Davis report that the cost of the rectification of the works set out in appendix 10 of the Davis report is as follows:

58 The details as to how those amounts are comprised are set out in an annexure to Mr Yeh's report in spreadsheet form in elaborate detail. The total of these amounts is $325,322.

59 As has been mentioned, in his evidence Mr Gibson referred to various notices being served under clause 30.3 of the Contract. Clause 30.3 is concerned with defective works and provides:

30.3 Defective materials or work

If the Superintendent discovers material or work provided by the Contractor which is not in accordance with the Contract, the Superintendent may direct the Contractor at its own cost to:

(a) remove the material from the Site;

(b) demolish the work;

(c) reconstruct, replace or correct the material or work; or

(d) not to deliver the material or work to the Site.

The Superintendent may direct the time within which the Contractor must commence and complete the removal, demolition, replacement or correction.

If the Contractor falls to comply with a direction issued by the Superintendent pursuant to clause 30.3 within the time specified by the Superintendent in the direction and provided by the Superintendent has given the Contractor notice in writing that after the expiry of 7 days from the date on which the Contractor receives the notice the Principal intends to have the work carried out by other persons, the Principal may have the work of removal, demolition, replacement or correction carried out by other persons and the cost incurred by the Principal in having the work so carried out shall be a debt due from the Contractor to the Principal.

60 In his submissions, I did not understand Mr Craig to attack the integrity or bona fides of the evidence presented by Walsh Street in regard to the defects or the quantum of the cost required to rectify them. Instead, he contended that Walsh Street's offsetting claim for defects relied on clause 30.3 of the Contract and the preconditions required to create a debt under clause 30.3 had not been satisfied.

61 Mr Craig contended in his written submissions that no offsetting claim relying on clause 30.3 can arise for two principal reasons. First, he submitted that Walsh Street has failed to fulfil a precondition of clause 30.3, namely to point to a failure by BMF 'to comply with a direction issued by the Superintendent'. BMF asserts that it lawfully suspended construction work on the Contract by close of business on 2 April 2019[71] and that the directions made by Walsh Street to rectify works pursuant to clause 30.3 were given after 2 April 2019. As such, Mr Craig submitted that because the direction to rectify works was made after the works were validly suspended, it cannot be shown that BMF has failed to comply with a direction issued by the Superintendent, a precondition for Walsh Street to be contractually entitled to have the work undertaken and to recover the costs incurred.

62 The second reason that Mr Craig submitted that the offsetting claim must fail is because Walsh Street has not proceeded to have the allegedly defective work carried out by other persons or incurred the cost necessary to create the debt as required by clause 30.3. As such, he submitted that no crystallised or accrued right has come into existence and that Walsh Street's evidence in this regard rises no higher than an assertion to the effect that Walsh Street intends to have those defects rectified; any intention to have defects rectified does not give rise to a contractual debt pursuant to clause 30.3 and that Walsh Street may well never have the alleged defects rectified.

63 I will not proceed to consider the question whether Walsh Street has fulfilled the preconditions in clause 30.3 because, as the application unfolded, the clause 30.3 claim for the defects was ultimately not pressed by Walsh Street. Rather, at the hearing of this matter Walsh Street characterised its claim for defects as a breach of contract claim, rather than a claim which relied upon and only arose under clause 30.3 of the Contract. In the running of the application, Mr Fary accepted that the steps required to create a debt under clause 30.3 had not all been undertaken[72] and relied instead on a contention that BMF had breached the Contract by reason of the defects described in the various expert reports to which reference has been made.

64 In response to Mr Craig's submission that the occurrence of the suspension effectively prevented Walsh Street from making a claim under clause 30.3, Mr Fary submitted that, because the cause of action accrued prior to the suspension of works, Walsh Street is not confined to recovery from BMF in respect of defects to the contractual machinery of the clause 30 regime.[73] He submitted that Walsh Street has a right to have the Contract performed, which included a right to have the works delivered in a workmanlike manner as provided in clause 3.6 of the contractor's general warranties. The breaches by BMF in that regard accrued prior to the suspension of the works and Mr Fary contended that it cannot be the case, by reason that BMF asserts that it has lawfully suspended works under the SOP Act, that this absolves it of claims for breaches of contract which arose prior to that suspension. Mr Fary observed that BMF may never return to the site after having suspended the works; it cannot be the case that Walsh Street cannot have recourse to BMF to rectify the defective works by reason that there is no obligation on the part of BMF to go back on site. Further, Mr Fary said it is arguable that BMF is required to comply with the directions given under clause 30.3 of the GC's even while the construction work under the Contract is suspended. He submitted that it does not necessarily follow that the effect of a suspension of works is a suspension of future works required in respect of rectification of defects which came into existence prior to the clause 30.3 notices and that clause 30.3 is not the 'universe' or a code within which the defects issue is required to be resolved.

65 Mr Fary submitted that the decision of the Court of Appeal in Grandview did not preclude offsetting claims for liquidated damages arising from the cost of rectification of defects or claims for interest and referred to the passage of Grandview extracted at paragraph 40 above.

66 Mr Fary submitted that it did not follow that, because Walsh Street had not yet gone down the path of having the work done by third parties to fulfil the requirements in clause 30.3 of the Contract, it was precluded from claiming damages for breach of contract arising from the defective work.

67 Mr Fary pointed to clause 3.6(b) of the GCs in support of Walsh Street's claim for damages for breach of contract. Clause 3.6(b) provides that certain general warranties are given by BMF:

3.6 Contractor's general warranties

The Contractor warrants to the Principal that:

(a) ...

(b) the Contractor shall execute and complete the work under the Contract:

(i) in accordance with the Drawings and Specification;

(ii) in accordance with the Planning Permit, all Approvals and all other Legislative Requirements;

(iii) in accordance with the Contract of Sale Requirements;

(iv) in a proper and workmanlike manner;

(v) in accordance with the Contract Program so that the Works will be completed by the Date for Practical Completion;

(vi) using Good Design and Construction Practices; and

(vii) in a manner which minimises annoyance and disturbance to owners and occupiers of properties in the vicinity of the Site;

68 Clause 3.7 of the GCs provides for certain statutory warranties to be given by BMF:

3.7 Contractor's statutory warranties

(a) The Contractor acknowledges that the Works include domestic building work for the purposes of the DBC Act. In addition to, and without derogation from, the Contractor's other obligations under the Contract, the Contractor shall perform the Works in accordance with the requirements of the DBC Act.

(b) The Contractor warrants and represents to the Principal that at least one of its directors is registered as a builder under the Building Act, as specified in Annexure Part A, and that at least one of its directors for the time being shall remain registered as a builder under the Building Act for the duration of the performance of the Works.

(c) The Contractor warrants and represents to the Principal that it is the holder of building practitioners' and any other insurances required, if any, under the Building Legislation in respect of the work under the Contract.

(d) The Contractor warrants and represents to the Principal that the Contractor has obtained or prior to commencing the Works it will obtain foundations data in relation to the Site in accordance with section 30 of the DBC Act, and that the Contractor will provide copies of all such foundations data to the Principal upon request.

(e) The Contractor warrants and represents to the Principal that any provisional sum included by the Contractor in the Contract has been calculated with reasonable care and skill taking into account of all the information reasonably available at the date the Contract is made, including the nature and location of the Site.

(f) Pursuant to section 8 of the DBC Act, the Contractor warrants:

(i) that the Works will be carried out in a proper and workmanlike manner and in accordance with the Drawings and Specification;

(ii) that all materials to be supplied by the Contractor for use in the Works will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the Contract, those materials will be new;

(iii) that the Works will be carried out in accordance with, and will comply with, all Legislative Requirements and the Building Legislation; and

(iv) that the Works will be carried out with reasonable care and skill and will be completed by the Date for Practical Completion.

(g) Without affecting clause 35.5, the Contractor acknowledges that the Contractor's Program makes or will make sufficient allowances for anticipated delays to the performance of the Works by reason of:

(i) inclement weather and the effects of inclement weather;

(ii) weekends, public holidays, rostered days off and other foreseeable breaks in the continuity of the Works; and

(iii) any other delays that is reasonable having regard to the nature of the Works.

(h) For the purposes of section 40(4) of the DBC Act, the parties agree that the provisions of sections 40(2) and 40(3) of the DBC Act did not apply to payment for the Works, and that the provisions of clause 42 shall apply to payment for the work under the Contract.

69 Mr Fary referred to clause 3.7(a) of the GCs which includes an acknowledgement that the Works include domestic building work for the purposes of the DBC Act. Mr Fary made reference to s 8 of the DBC Act which prescribes warranties about the work carried out under a domestic building contract. He referred in particular to sub-paragraph (a):

The Builder warrants that the Work will be carried out in a proper and workmanlike manner and in accordance with the plans and specifications set out in the Contract.

70 Mr Fary summarised the offsetting claim for the defects as being that under the Contract, Walsh Street, as developer, had a bargain with BMF, as builder, to perform construction works in a proper and workmanlike manner. Walsh Street alleges that BMF breached the Contract and that they are entitled to damages for the loss of the bargain, and one measure of that loss is the cost of rectification which is summarised in the expert reports exhibited to the Gibson affidavits.

Graywinter dispute - was the breach of contract claim 'raised'?

71 Mr Craig submitted that Walsh Street could not contend that it could bring a claim for loss of damages (without reliance on clause 30.3) by reason that the 21 day affidavit identifies the sole basis for any entitlement to recover for defects as arising by operation of clause 30.3. Mr Craig referred to Walsh Street's 21 day affidavit, being the Gibson June affidavit, and to paragraphs 81, 85 and 92 of that affidavit in particular and noted that each of those paragraphs expressly referred to clause 30.3 as being the source of Walsh Street's entitlement to damages. On an application of the Graywinter principle, he says that the breach of contract claim cannot now be raised.

72 The Court of Appeal in Malec referred to the importance of focusing on the specific grounds which are raised in the 21 day affidavit to inform whether the ground sought to be raised after the 21 day affidavit has been excluded by virtue of the specificity of the ground which is accepted as having been raised. In Malec, the Court of Appeal ultimately found on the facts of that case that the specificity of one ground precluded the raising of another. The Court of Appeal considered that the ground raised by Malec in its 21 day affidavit was of a quite different character and for a markedly different sum to the claim later raised by Malec that it had been overcharged for fuel based on Malec's records of what fuel had actually been used and for a markedly different sum to the claim which Malec sought to later raise.[74]

73 The law in relation to the application of the Graywinter principle has been surveyed above. I do not consider that Walsh Street's agitation of an offsetting claim based on breach of the Contract by reason of the alleged defects offends the Graywinter principle in the way that the applicant was found to have done for example in Malec. In its 21 day affidavit, Walsh Street has contended that there is an offsetting claim arising out of the defects in the works provided by BMF and that it was seeking compensation. In its 21 day affidavit Walsh Street did refer to notices of defects issued by the Superintendent mentioning clause 30.3 but I consider that on a fair reading of the 21 day affidavit BMF was alerted and given fair notice that Walsh Street was contending that it had substantial offsetting claims in respect of the defects in the work performed by BMF for the project. Despite the specific reference to the clause 30.3 claim in the 21 day affidavit in several places, I do not consider that Walsh Street is confined to arguing that its only avenue for redress for the allegedly defective work is under clause 30.3. Walsh Street seeks to substantiate its claims in respect of those defects in this application by reference to its contractual rights set out in the Contract. The Contract was exhibited to the 21 day affidavit. In addition, the 21 day affidavit exhibited a document dated 21 May 2019 headed 'Notice of Dispute Given by Walsh Street to BMF under clause 47.1 of the major domestic building contract (with design) dated 20 April 2016'.[75] Mr Fary referred in particular to paragraph 60 of that Notice of Dispute which stated:

The Principal contends that the defects constitute breaches by the Contractor of its warranties given in clause 3.6(b) of the General Conditions, in respect of which the Contractor is liable for damages, and that its failure to pay the full amount certified in Payment Schedule 30 (including the value of the Accepted Defects) constitutes a breach of clause 42.1 of the General Conditions.

74 The Notice of Dispute informs BMF in clear terms that Walsh Street considers that BMF's performance of the Contract has resulted in defective works and culminates in the contention at paragraph 60 that Walsh Street considers that defects constitute breaches of the Contract by BMF for which it is liable for damages. Again, in my view, the Notice of Dispute, in particular paragraph 60, 'fairly alerts' BMF to the claim which Walsh Street seeks to agitate in this application.

75 While the 21 day affidavit does make specific reference to clause 30.3, the claim for damages for breach of contract which Walsh Street agitates is in my view clearly 'revealed' and the subject of fair notice to BMF. It might be said, to adopt the expression of Lindgren AJA in NA Investment Holdings,[76] that the reference to clause 30.3 may have thrown BMF 'off the scent'. However, the substance of the offsetting claim that Walsh Street seeks to bring, i.e. defects in the construction, is of the same character, has its basis in the same facts and is a claim in respect of the same defects. I consider that the Gibson June affidavit 'sufficiently asserted the existence of facts on which the offsetting claim was grounded'.[77] The inclusion of the Contract and the Notice of Dispute lead me to form the conclusion that on a fair reading of the 21 day affidavit, BMF was alerted of the claim which Walsh Street agitates for breach of contract and the Graywinter principle is not infringed.

Other arguments raised during the application

76 In both written submissions and at the hearing of the application, the parties made other submissions in respect to Walsh Street's claim for defects sounding in a claim for damages. By reason of my view expressed below that an application to set aside a statutory demand is not the appropriate venue to determine such elaborate arguments requiring conclusions as to facts and law and investigation of contested legal issues, I shall only summarise the further submissions rather than give them detailed consideration. As the authorities referred to in paragraphs 6 to 18 above state, it is not ordinarily appropriate in applications under s 459G to embark on an analysis and come to conclusions concerning complex issues of contract law which I consider that the submissions summarised below give rise to.

77 Mr Craig made the following contentions regarding Walsh Street's claims in respect of defects:

(a) Walsh Street, as developer, has not suffered any loss as it is not the owner of the property;

(b) Walsh Street has not filed any evidence showing actual damages and therefore is not entitled to an offsetting claim;

(c) the Development Services Agreement ('the DSA') as amended by the Deed of Variation[78] was not in evidence in the Gibson June affidavit, being the 21 day affidavit and does not show that Walsh Street has any extant liability for the alleged defective work. Even if such liability exists, it has not crystallised and therefore cannot be offset as Walsh Street has not suffered loss, alternatively it is hypothetical; and

(d) as Walsh Street does not own the property, the proper party to bring any such claims for alleged defects are the property owners and not Walsh Street and no owners have made any such claim.

(a) Walsh Street's loss arises from the DSA, particularly clause 5.1 of that agreement whereby Walsh Street agreed to provide services to the land owner including being liable for any 'neglect, default or delay in the delivery' of the project including 'any loss and damage';

(b) Walsh Street had provided elaborate evidence of the defects and the quantification of the cost of their rectification;

(c) Walsh Street was entitled to supplement its evidence outside of the 21 day period, which it has done with the DSA to show the contractual exposure it has. 'Crystallisation' is language used for contingent liabilities and Walsh Street's liability is not contingent, rather it is an extant claim for breach of contract;

(d) it is irrelevant that no claim has been made against Walsh Street by an owner as the exposure was in existence at the time of the service of the Demand and of the making of the application and as such is susceptible of being raised as an offsetting claim.

79 I consider that the complexity of the issues which require consideration in respect of the contentions made by the parties in respect of these issues should be resolved in conventional inter partes proceedings and not in a statutory demand application. As Young J stated in John Holland Construction about a disputed debt, 'if proof of a claim is required then one would be doing the very thing that one is not to do, and that is to try this sort of dispute in the Companies Court'.[79]

80 In saying this, the arguments which Mr Craig makes as to the sustainability of the position being put by Walsh Street may ultimately, when the subject of a conventional inter partes proceeding, be sustained. The authorities to which reference has been made at paragraphs 13 to 18 above make it clear that the Court, in applications of this type, should not embark on a detailed assessment of the merits of the arguments being respectively put by the parties and to reach conclusions as to anything other than quite straightforward principles of contract law unless the position is quite plain. Rather, the Court's task is to assess whether the dispute or claim is genuine, arguable, gives rise to a triable issue and warrants further investigation through the process of a conventional inter partes proceeding.

81 I consider that the claims in respect of defects being advanced by Walsh Street appear to be bona fide and genuine, not fanciful or spurious, and that they have a significant and substantial basis. As I have said, I did not understand BMF in its submissions as contending that the claims in respect of defects are bogus, or have been concocted or manufactured for the purposes of defeating the demand made against Walsh Street. I consider that the evidence in support of the offsetting claim seeking rectification for defective works more than meets the standard described by Black J in Re Diveva Pty Ltd extracted at length in paragraph 12 above. The level of evidence in support of the quantification of rectification in my view more than suffices for the Court to make an estimate of the amount of such claim in order to apply the formula set out in s 459H of the Act. As such, I consider that Walsh Street has surpassed the relatively modest level of onus that bears to establish that it has arguable offsetting claims arising from the defects and damages claim and that it is appropriate for this purpose of this application to estimate the cost of such defects as $1,118,830.[80] To adopt the expression of McPherson JA in JJMMR Pty Ltd v LG International Corp, I consider that Walsh Street has established that its offsetting claims for defects 'have an existence that is objectively demonstrable independently of the exigencies of the demand that evoked it'.[81]

C. BMF's alleged breaches of the settlement agreement

82 This claim is the subject of evidence in the Gibson June Affidavit and is said to give rise to an offsetting claim of $181,250. At the hearing of this matter Mr Craig conceded this to be a genuine offsetting claim for the purposes of this proceeding which should be brought to account in Walsh Street's favour.

D. Liquidated damages for late completion under the contract

83 This consists of an offsetting claim for $136,944 in respect of liquidated damages payable by BMF for failure to bring the works under the Contract to practical completion on time. It is the subject of evidence in Gibson June Affidavit.[82] At the hearing of this matter it was a subject of a concession by Mr Craig for the purposes of this proceeding that it amounted to a genuine offsetting claim by Walsh Street for $136,944 which should be brought to account in Walsh Street's favour.

84 Walsh Street makes a claim for interest on the sums which it claims are payable to it in categories C and D pursuant to clause 42.9 of the general conditions.[83] In respect of category D interest is claimed at a rate of 10% per annum and in respect of category C also at a rate of 10% but under the Penalty (Interest Rates) Act 1983 (Vic). These interest claims total $17,07.40 but Mr Fary in his submissions foreshadowed that these claims for interest are continuing to accrue and will be required to be recomputed.

85 This claim is in respect of the costs awarded in favour of Walsh Street in an earlier statutory demand served on it by BMF in respect to identical claims made in the Demand. Walsh Street applied for orders setting aside this demand in proceeding S ECI 2019 02036. On 29 May 2019, Randall AsJ ordered by consent in that proceeding that the demand be set aside and that BMF pay Walsh Street's costs of that proceeding on a standard basis. At the hearing of this matter BMF conceded that those costs gave rise to a genuine offsetting claim of $19,099. That amount should be brought to account in Walsh Street's favour.

86 Mr Fary then moved to the subject of what he described as the 'overpayment' claim. This claim, characterised by Walsh Street as an offsetting claim, is based on the contention that Walsh Street says that it has overpaid BMF in excess of $500,000.00. The calculation of the alleged overpayment is the subject of a detailed schedule to Walsh Street's further written submissions filed on 16 October 2019. Mr Craig submitted that no overpayment claim had been raised in the Gibson June Affidavit, the 21 day affidavit, and on an application of the Graywinter principle could not be agitated in the application. It is therefore necessary to consider whether the overpayment claim has been appropriately raised in Mr Gibson's 21 day affidavit.

87 In this regard Mr Craig submitted that the position as outlined in the 21 day affidavit is that Walsh Street had underpaid BMF and that it was only in the Gibson October affidavit that Walsh Street contended that it had overpaid BMF.[84]

88 Mr Fary contended that the source of the entitlement by Walsh Street to raise the overpayment claim is to be found in paragraphs 34, 43 and 51 of the Gibson June affidavit. Mr Fary contended that those paragraphs raised an issue between the parties as to what had been paid to BMF by Walsh Street and what remained owing. This, he contended, was sufficient to enable Walsh Street to later agitate the overpayment claim.

89 I do not agree with that submission. Paragraphs 34 and 35 of the Gibson June Affidavit state as follows:

1. I also dispute [BMF's] valuation of the unpaid portion of PC52 as set out in the statutory demand.
2. The amount of $498,970.47 has been paid by [Walsh Street] to [BMF] in relation to PC22. Therefore the 'unpaid' portion of PC22 is $84,321.60 and not $115,149.57 plus interest as claimed by [BMF] in the statutory demand ...

1. I also dispute [BMF's] valuation of the unpaid portion of PC28 as set out in the statutory demand.
2. The amount of $403,951.08 has been paid by [Walsh Street] to [BMF] in relation to PC28. Therefore, the 'unpaid' portion of PC28 is $28,868.13 and not $278,942.68 (plus interest) as claimed by [BMF] in the statutory demand ...

1. I also dispute [BMF's] valuation of the unpaid portion of PC29 as set out in the statutory demand.
2. The amount of $415,092.44 was paid by [Walsh Street] to [BMF] in relation to PC29. The 'unpaid' portion of PC29 is $503,233.50 and not $659,411.68 plus interest as claimed by [BMF] in the statutory demand...

92 The position of Walsh Street in regard to the amounts payable to BMF under the progress claims is at paragraph 56, where Mr Gibson deposes after referring to paragraphs 35, 43 and 51 that the total 'unpaid portion' with respect to PC22, PC28 and PC29 is $616,423.23. The evidence of Mr Gibson in the Gibson June Affidavit is that Walsh Street, rather than owing $1,053,503.93 in respect of outstanding amounts due under the three payment claims, was only obliged to pay BMF $616,423.23. As such the position being put in the 21 day affidavit was a contention that Walsh Street, rather than overpaying BMF, had underpaid the three claims by only $616,423.23.

93 In Mr Fary's initial written submissions of 26 September 2019, there were cross‑references to relevant parts of the Gibson August affidavit and the Gibson September affidavit in regard to the overpayment claims. In Mr Fary's further written submissions of 16 October 2019, the position in this regard is summarised as being that Walsh Street has overpaid BMF $561,692.35. The question is whether Walsh Street is entitled to propound a position in respect of the outstanding amounts under the payment claims which is quite at odds with that propounded in the 21 day affidavit.

94 In my opinion, Walsh Street is not entitled to agitate the overpayment claim. The position is somewhat akin to that considered by the Court of Appeal in Malec where the appellant had sought to agitate quite a different offsetting claim to that raised in the 21 day affidavit. The Court considered that the ground upon which the appellant relied in the 21 day affidavit to raise a genuine dispute or offsetting claim was different in character and type from the ground raised in the later affidavit.[85] The 21 day affidavit in this instance does not, in my view, 'fairly alert' BMF to the case it now seeks to press, which involves quite a different scenario to that originally contended in the Gibson June affidavit. This is illustrated by the fact that in paragraph 13 of the Gibson October affidavit Mr Gibson states 'I do not now consider that the plaintiff has underpaid the defendant'.[86] In my view, Walsh Street cannot contend that BMF was alerted to an argument about which Walsh Street has changed its position, with Mr Gibson concluding with a statement in paragraph 14 'instead, I consider that the plaintiff has overpaid the defendant'.[87]

95 In my opinion, applying the analysis of the Court of Appeal in Malec and the cases that are collected in the decision, this must on an application of the Graywinter principle result in a conclusion that the overpayment claim is not available to Walsh Street.

96 As explained above, it was conceded that PC29, an amount of $678,741.38, cannot be the subject of a genuine dispute by Walsh Street. By reason of the foregoing analysis in regard to the several offsetting claims agitated in this application, and adopting the categories of identification given to them in Mr Fary's first written submissions, the position as between the parties would appear to be as follows:

Liquidated damages for late completion of the Contract

(this will need to be the subject of computation by the parties)

97 The parties should agree the amount for interest in item E above in order that the Court may perform the calculation required by s 459H of the Act, in particular the amount of the offsetting total as that expression is defined in s 459H(2). Even though the offsetting claims of Walsh Street overwhelm BMF's claim so as to extinguish the Demand and require the Court to set aside the Demand, the regime set out in s 459H requires calculation of the offsetting total to apply the substantiated amount formula in s 459H(2) and attract the jurisdiction which requires that the Demand be set aside by operation of s 459H(3).

98 At the delivery of reasons in this matter, I indicated that I would be making an order that the statutory demand be set aside, but asked the parties to calculate the amount for interest in item E of the table in order to perform the calculation required by s 459H(2). The parties have agreed that the sum for interest should be $52,568.66. This figure comprises $33,171.23 in interest for category C at a rate of 10 per cent per annum in accordance with the Penalty (Interest Rates) Act 1983 (Vic) from 7 December 2018 to 5 October 2020 and $19,697.42 in interest for category D at a rate of 10 per cent per annum in accordance with clause 42.9 of the GCs from 29 April 2019 to 5 October 2020. Thus, the amount of Walsh Street's offsetting claims, when applied against PC 29, the bank guarantee and the reduced value in work due to defects (the amounts in respect of items A, G and H in the table above) overwhelm BMF's demand by an amount of $489,305.24.

[1] [2015] VSCA 330, [47]-[51].

[2] For example, see Rhagodia Pty Ltd v National Australia Bank [2008] NSWCA 73; (2008) 67 ACSR 367 [112], per Robson J; Solarite Air Conditioning Pty Ltd v York International Aust Pty Ltd [2002] NSWSC 411 [23], per Barrett J ('Solarite').

[3] (1994) 15 ACSR 347, 353.

[5] Ibid 354. See, generally, Farid Assaf, Statutory Demands and Winding Up in Insolvency (LexisNexis, 2nd ed, 2012), [5.18].

[6] [2003] NSWSC 896.

[8] Solarite (n 3) [23].

[9] Assaf (n 6) [6.20]. See also Sewmail (Australia)Pty Ltd v Booby Traps Pty Ltd (1997) 23 ACSR 339.

[10] [2001] NSWSC 743.

[12] [2015] NSWSC 509.

[13] When one considers the reasons in Zenaust, from the context it appears that the word 'sufficient' is a typographical error and should have read 'insufficient'.

[14] Diveva (n 13) [17]-[20].

[15] John Holland Construction Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250, 254 ('John Holland Construction').

[16] [2002] NSWSC 584.

[17] [2002] NSWSC 45.

[19] [1994] Vic Rp 61; [1994] 2 VR 290.

[20] (1994) 12 ACSR 785.

[21] (1994) 15 ACSR 347.

[22] [2001] NSWSC 275; (2001) 38 ACSR 42.

[23] Club Marconi (n 17) [16]-[21].

[24] [2004] FCA 1057; (2004) 50 ACSR 314.

[26] [2012] NSWCA 365; (2012) 297 ALR 372 ('Infratel').

[28] [2009] FCA 519; (2009) 255 ALR 516.

[29] Ibid [18]. See also Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379, 384-85.

[30] [2012] NSWSC 1501, [22].

[31] [1996] FCA 822; (1996) 21 ACSR 581.

[32] [2007] NSWSC 103; (2007) 61 ACSR 321 ('Hansmar Investments').

[33] [2003] NSWSC 147; (2003) 21 ACLC 533.

[34] [2001] NSWSC 52.

[35] [2007] NSWSC 1143; (2007) 214 FLR 393 ('Saferack').

[36] [2002] NSWSC 45.

[37] Saferack (n 36), 399-400.

[38] [2001] WASCA 360.

[39] Saferack (n 36) 400.

[40] [2009] NSWSC 842. See also QNI Resources Pty Ltd v North Queensland Pipepline No 1 Pty Ltd [2017] QCA 297, [52]-[53].

[42] [2010] NSWCA 210; (2010) 79 ACSR 544 ('NA Investment Holdings').

[45] [2012] NSWSC 1208.

[46] [2004] NSWSC 560.

[48] [2005] NSWSC 664.

[49] Zhongfu (n 46), [31].

[50] Malec (n 2), [107].

[52] Malec (n 2) [102].

[53] Malec (n 2) [99].

[54] [2016] VSCA 315.

[56] Exhibit MDG-4 to the Gibson June affidavit.

[57] [2019] VSC 436.

[58] Ibid [42]. In brief terms, a reference date is a date determined by or in accordance with the terms of the contract as a date on which a claim for a progress payment may be made or a date by reference to which the amount of a progress payment is to be calculated in relation to a specific item of construction work or related goods and services.

[59] [2019] NSWCA 60; (2019) 99 NSWLR 397.

[62] See Gibson August Affidavit, [7]-[35].

[63] Gibson June affidavit, [81] onwards, Gibson August affidavit, [5] and Gibson September affidavit, [8]. See also the Woods affidavit, [5].

[64] See Exhibit MDG-23 to the Gibson June Affidavit.

[65] The defects list maintained by the Superintendent as at 27 May 2019 is found in Exhibit MDG-22 to the Gibson June affidavit and runs to 11 pages, with a majority of defects dating prior to 31 January 2019.

[66] Exhibit MDG-25 to the Gibson June affidavit.

[67] Exhibit MDG-27 to the Gibson June affidavit.

[68] See Martin Report, 98 [41], being Exhibit MDG-45 to the Gibson August affidavit, 740.

[69] Exhibit MDG-45 to the Gibson August affidavit, 793.

[70] Exhibit MDG-45 to the Gibson August affidavit, 204.

[71] BMF submits two alternative dates upon which the works are said to be suspended, namely 12 March 2019 and 2 April 2019, (see Robinson affidavit, [32] and [41]). On either view, whether the suspension occurred on 12 March 2019 or 2 April 2019 BMF submits that the directions to rectify works were made after 2 April 2019 so in this context the date is not material.

[72] Transcript of proceedings of 8 October 2019, 82 ('Transcript').

[74] See Malec (n 2) [100]-[106].

[75] Exhibit MDG-43 to the Gibson June affidavit.

[77] Raffles Corp Pty Ltd v CECH [2001] QSC 129, [8].

[78] Woods affidavit, [8] and Exhibit PW-1 to Woods affidavit, 10-145.

[79] John Holland Construction (n 16) 253.

[80] This comprises $793,509 from the Martin report and $325,322 from the Yeh report, a total of $1,118,831, which is $1 more than claimed by Walsh Street.

[81] [2003] QCA 519, [18].

[82] See Gibson June affidavit, [106]-[115].

[83] Walsh Street originally contended that interest would be payable under category A, but in the circumstances of this category now being a credit in favour of BMF, cannot be pressed.

[84] Gibson October affidavit, [8]-[15].

[85] Malec (n 2) [105].

[88] As noted earlier, the quantifications of the Martin and Yeh reports total $1,118,831 however Walsh Street seeks $1,118,830.