Walton Construction Pty Ltd v Pines Living Pty Ltd [2013] ACTSC 114

4. Walton has made various claims pursuant to the Building and Construction Industry (Security of Payment) Act 2009 (ACT) ("SOP Act"). Payment claim 28 ("PC 28") was made in October 2012. Payment claim 29 ("PC 29") was made on 22 January 2013 under the SOP Act. PC 29 claimed $294,254.98. It included the contract works and variation works claimed in PC 28 and additional contract works and variation works undertaken between October 2012 and 15 January 2013.

5. On 6 February 2013 Pines sent a payment schedule under s 16 of the Act to Walton in response to PC 29. That payment schedule asserted that the amount to be paid was nil. The reasons for withholding payment, required by s 16(3) of the Act, were:

1. both the validity and valuation of variations claim is disputed;
2. the valuation of the balance of works is disputed;

1. the Respondent is entitled to deduct liquidated damages against the claimed amount (Contract, cl. 12.19) which exceed the claimed amount; and

1. the Claimant is in breach of its obligations under the Contract to correct defects (Contract, cl. 9.6).

6. On 20 February 2013 Walton submitted an adjudication application. The adjudicator, Mr John O'Brien of "Adjudicate Today" received submissions from the parties and made an adjudication determination dated 18 March 2013. On 22 March 2013 the adjudication determination was sent to the parties. That adjudicator decided that the amount of the progress payment to be paid by Pines to Walton was $239,005.86. He decided that the due date for payment was 6 February 2013 and that Pines was to pay 100% of the adjudicator's fees. The adjudicator gave reasons for his decision which extend over some 146 paragraphs.

7. On 3 April 2013 Walton gave notice of intention to suspend works under s 26 of the SOP Act. Section 27 of the SOP Act permits an adjudication certificate to be filed as a judgment for a debt and permits it to be enforced in any court of competent jurisdiction. Judgment was entered in the Supreme Court of the Australian Capital Territory on 11 April 2013 in an amount of $254,902.91. That was the sum of the adjudicated amount, interest and adjudicator fees. That judgment was only released by the Court on 23 April 2013. On that same day Walton gave notice of the Court order and enforcement options by serving on Pines Form 2.49 "Notice about Court order and enforcement options" and Form 2.85 "Certificate of registration of enforceable order".

8. On 3 May 2013 Pines was served with a creditor's statutory demand by Walton based on the Adjudication Certificate. An application to set aside that statutory demand was filed in this Court on 24 May 2013.

9. On 13 May 2013 the solicitors for Walton registered the judgment of the ACT Supreme Court in the Supreme Court of New South Wales. As a consequence of the registration of the judgment Walton was able to apply by notice of motion for a garnishee order from the New South Wales Supreme Court. That process did not require the giving of further notice to Pines. A garnishee order was issued to the Commonwealth Bank of Australia and served on 28 May 2013 and that led to the payment of $258,296.96 from the account of Pines at the bank.

10. On 31 May 2013 Pines was given leave to file in court an application dated 30 May 2013 seeking the following orders:

1. That any moneys paid to the judgment creditor by way of enforcement of the Adjudication Certificate dated 3 April 2013 registered as an enforceable order on 11 April 2013 be paid into Court.
2. That enforcement of all of the Adjudication Certificate dated 3 April 2013 registered as an enforceable order on 11 April 2013 (the "Adjudication Certificate") be stayed.
3. That the judgment creditor be restrained from taking any further steps to enforce the Adjudication Certificate, including without limitation in New South Wales Supreme Court proceedings 2013/00147377.
4. That the judgment creditor pay the judgment debtor's costs.

11. There are presently three sets of proceedings before the Court. In the first set of proceedings (SC 115 of 2013) Pines seeks to set aside the statutory demand issued by Walton. I will ignore, for the moment, the procedural defects in relation to this application. The second set of proceedings (SC 193 of 2013) seek an order in the nature of certiorari to quash the adjudicator's decision dated 18 March 2013. Those proceedings were filed on 22 May 2013. Finally, there is also an application for leave to appeal and leave to do so out of time from the adjudicator's decision pursuant to s 43 of the SOP Act (SCA 34 of 2013). Section 43 of the SOP Act permits an appeal to be made to the Supreme Court on "any question of law arising out of the adjudication decision". In circumstances where there is no consent by the parties to the bringing of an appeal, such an appeal can only be brought with the leave of the Supreme Court and there are significant hurdles that must be met before the Supreme Court may grant leave: see s 43(3)-(4).

12. The grounds sought to be agitated in the s 43 appeal and in the certiorari proceedings are similar. The certiorari proceedings have been brought in order to avoid the consequences of the fact that the application for leave to appeal is out of time. There is even an argument that the certiorari proceedings are out of time because they have been filed "later than 60 days after the date when the grounds for the grant of the relief sought first arose": rule 3557(2). I was not taken to any material which provides an explanation for the delay by Pines in seeking to contest the validity of the adjudicator's decision.

13. The grounds alleged in the application for leave to appeal and the proceedings for certiorari are, in summary, that:

(a) Walton's adjudication application "was an abuse of the Act";

(b) The adjudicator did not have jurisdiction where "the payment claim under consideration was in substance a repetition of a previous payment claim under the Act";

(c) The adjudicator had erred in construing the terms of the contract in relation to defects and the adjudicator had failed to take into account the defects which had been notified to Walton and valued;

(d) The adjudicator erred in holding that Pines would be unable to sufficiently quantify liquidated damages until the works had reached practical completion and was not entitled to deduct or set off such quantification against the second respondent's claim.

14. On 31 May 2013 when the matter first came before me Walton undertook to deposit in the trust account of its solicitors any moneys received pursuant to the garnishee order made by the New South Wales Supreme Court and to take no further action in relation to the enforcement of the judgment. Pines gave the usual undertaking as to damages. I then made some directions in order that the matter could be argued before me on 7 June 2013.

15. Pines submitted that there was a serious question to be tried based on a brief articulation of the arguments in support of the grounds which I have set out above. In relation to the balance of convenience, Pines pointed to the fact that it had limited resources to complete the project and was under pressure from its bankers to begin repaying some of the loan facility now that units in the development are being sold. A director of Pines has identified that the company is under "extreme financial pressure" as a consequence of the execution of the garnishee order. The reasons for this are set out in the affidavit of Mr Aggarwal dated 3 June 2013 and may be summarised as the bank requiring repayment of its loan facility, limited sales of units and continuing outgoings required to sell units and maintain the property. Pines also pointed to the provisions of the Retirement Villages Act 2012 (ACT) which permit the ending of a retirement village contract before the end of the "settling in period" and the limited liability of an occupant to pay money if the contract is terminated, which, Pines submitted would give an obligation to repay money already paid.

16. Pines submitted that the financial statements of Walton revealed that it is in "some financial trouble of its own". It submitted that the evidence of Walton's accounts and the affidavit evidence of Mr Craig Walton, which I will refer to in more detail below, does not demonstrate that the concerns of the auditors have been allayed.

17. As a consequence, it submitted that Pines' need for the money is acute and there is a real risk that if Walton gets the money it might not be in a position to repay it. It also submitted that having regard to the fact that the substantive hearing is only two weeks away Walton would only be shut out of its money for a short period and that an injunction should be granted.

18. Walton submitted that the application was misconceived because this Court either could not or should not interfere with the judgment entered in the New South Wales Supreme Court in circumstances where Pines had not taken the steps required by s 106 of the Service and Execution of Process Act 1992 (Cth). However Walton conceded that it was open to this Court to grant in personam relief against Walton pending the determination of the various applications made by Pines.

19. Secondly it submitted that none of the errors identified are jurisdictional errors which might found an application for certiorari and that an application for leave to appeal under s 43 of the SOP Act is well out of time.

20. Thirdly it pointed to the particular significance of the context of the present application, namely, the SOP Act. As explained in the authorities, the legislation requires a judgment debtor to "pay now, argue later": Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140 at [96] and Walton referred to the policy implemented by the Act as summarised by Justice Finklestein in Protectavale Pty Ltd v K2K Proprietary Ltd [2008] FCA 1248 at [7]:

The Payment Act places the claimant in a privileged position in the sense that he acquires rights that go beyond his contractual rights: Jemzone Pty Ltd v Trytan Pty Ltd (2002) 42 ACSR 42 at 50. The premise that underlies the legislation is that cash flow is the lifeblood of the construction industry (Amflo Constructions Pty Ltd v Jefferies [2003] NSWSC 856 at [27]) and that the principal under a construction contract should pay now and argue later (Multiplex Constructions [2003] NSWSC 1140 at [96]).

21. Walton pointed to the authorities relating to the stay of judgments based on adjudications. It submitted that the mere risk of Walton's insolvency would not be enough to displace its statutory entitlement to payment. It pointed to the authorities summarised by Justice McDougall in RSA v VDM CCE and VDM CCE v RSA [2012] NSWSC 861 to the effect that there must be "more than a "real risk" that [the respondent] will suffer prejudice or damage, if a stay is not granted".

22. I accepted that at this preliminary stage there is a serious question to be tried. It cannot be said that the case is either an obviously weak or obviously strong one. It is clear that Pines has significant procedural hurdles to overcome having regard to the fact that its application for leave under s 43 is out of time and even its claim for certiorari is arguably beyond the time required by the Court Procedure Rules.

23. There is clearly a significant dispute between the parties as to amounts owing, liability for defects and responsibility for delay. These issues will have to be worked out in due course.

24. In RSA, Justice McDougall, having reviewed the previous decisions and, in particular, the decisions of Justice Einstein in cases addressing the situation where there is a risk that the recipient of a payment required by the SOP Act may not be able to repay it, recognised that it was necessary to balance the risks to the applicant that would arise if no stay were granted, to take into account the prejudice to the respondent to the application for a stay if a stay is granted and to take into account the policy of the Act.

25. In my view, notwithstanding that these authorities deal with the NSW legislation, having regard to the terms of the SOP Act and the objectives of the Act explained in the terms of the Explanatory Statement for the Bill which became the Act, a similar approach is warranted in relation to an application for an injunction to restrain dealing with the proceeds of a garnishee order resulting from a judgment arising out of an adjudication under the SOP Act.

26. Clearly Pines had a significant need for the funds which were garnisheed. However the clearly articulated policy position established by the legislation is that of "pay now, argue later". Walton is in a privileged position established by legislation which gives it an entitlement beyond those established by the contract.

27. In assessing the risk to Pines from the payment to Walton, clearly there were some issues of concern arising from the notes to the financial reports. Those accounts, which are for the year ended 30 June 2012 include a note which refers to the approximately $14 million loss incurred by the company during that year and the fact that the company's liabilities exceeded its assets by approximately $5.5 million. It also noted that the company had incurred losses of $6.9 million recorded in its unaudited management accounts for the period to 28 February 2013 and had breached various borrowing covenants in place with its financiers. It noted that if the company was to lose the support of its financiers and of a related party entity that would cast significant doubt on the company's ability to continue as a going concern.

28. The accounts showed total revenue of approximately $188 million, up from $182 million in the financial year ending 30 June 2011. The accounts also recorded in a note that the company has since 30 June 2012 "won significant contracts, which are expected to generate turnover in the vicinity of approximately $152,760,000, all of which are scheduled to commence in the 2013 financial year". Mr Walton, the managing director and sole director of Walton deposed to the fact that Walton was still trading as a builder, employing 120 staff. He listed the very substantial construction projects which it is in the process of building. He also identifies Walton Construction (Qld) Pty Ltd, a related company of which Mr Walton is the sole director and managing director, and says that "further financial accommodation of Walton can be made by Walton (Qld) if necessary".

29. This material demonstrates that the company is a substantial one undertaking a substantial number of projects of very significant value. Whilst there is clearly a risk of Pines being unable to recover money paid under the SOP Act there are no clear indicia at this stage of irrecoverability. The company continues to trade, is undertaking very substantial projects and it is clearly the policy of the Act to require interim payments to be made so as to avoid the risk of insolvency.

30. The present case is clearly different to a case such as RSA where the respondent had shut down its operations. Where a company is no longer a going concern or is under some form of external administration not only is there an increased risk that the recipient of the funds will be unable to repay them if required but the underlying purpose of the SOP Act, namely to maintain the cash flow of construction businesses so as to avoid insolvency has a lesser operation. As a consequence in such circumstances there is likely to be an increased willingness of courts to grant a stay or injunction in relation to payment of funds following an adjudication decision.

31. In the present case Pines also has the benefit of a bank guarantee in the sum of $350,000. The terms of the security clause in the contract between the parties appears to cover liability for both rectification of defects as well as other obligations under the contract. Although I do not want to be taken to express any concluded view on this issue it appears to be broad enough to encompass the obligation to pay liquidated damages. Whilst on the approach most favourable to Pines the amount of the guarantee is substantially less than the amount it alleges is owing to it, the guarantee does provide some security in relation to the recoverability of some of the amounts claimed from Walton.

32. I also had regard to the fact that the substantive argument in proceedings was to be heard in two weeks time and hence, subject to the possibility of a delay in delivering judgment, the period during which Pines would be exposed to the risks of Walton becoming insolvent should be a limited one.

33. Balancing the risks to each party in the light of the underlying policy of the legislation, in my view there should be no injunction so as to prevent Walton from obtaining access to the funds which have been garnisheed. One of the features of the Act is that it assigns the risk of insolvency to parties in the position of Pines rather than parties in the position of Walton. In the present case, whilst Pines clearly had a significant need for the funds and is exposed to some risks as a consequence of the interim payment required by the legislation, the risks posed by Walton were not, on the evidence, so great as to warrant a different position to the position suggested by the policy behind the legislation.

34. It is for these reasons that I made the orders that I did on 7 June 2013.

I certify that the preceding thirty-four numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Master Mossop.

Solicitor for the defendant: J S O'Connor, Harris & Co