Supreme Court quashes adjudication determination in Kitchen Xchange v Formacon Building Services

In brief - Adjudicator does not have jurisdiction where head contractor serves payment claim without accompanying supporting statement 

The NSW Supreme Court has held in Kitchen Xchange v Formacon Building Services [2014] NSWSC 1602 that an adjudicator lacks jurisdiction to determine an adjudication application under the Building and Construction Industry Security of Payment Act 1999 ("the Act") in circumstances where the relevant payment claim was served in breach of section 13(5) of the Act and where the payment claim was served by a head contractor without the accompanying supporting statement required by section 13(7) of the Act.

First payment claim withdrawn by head contractor following discussions

On 2 May 2014, the plaintiff Kitchen Xchange Pty Ltd contracted with the first defendant, Formacon Building Services Pty Ltd, in relation to Formacon's fit out of Kitchen Xchange's shop at Rouse Hill.  

 

Under the construction contract, payment of the contract price was to be made by four instalments - deposit; rough in of services and wall framing; delivery and installation of joinery; and completion.

 

On 4 June 2014 Formacon served a payment claim on Kitchen Xchange, stated to be made under the Act ("First Payment Claim"). 

 

The First Payment Claim was withdrawn by Formacon following discussions between Kitchen Xchange and Formacon.

Subsequent payment claims served on plaintiff by head contractor

On 12 June 2014 Formacon served a further payment claim on Kitchen Xchange, which was stated to be made under the Act and which claimed an amount slightly lower than the amount claimed in the First Payment Claim ("Second Payment Claim").

 

On 13 June 2014 the solicitors for Kitchen Xchange sent a letter to Formacon which identified the Second Payment Claim, indicated the amount that Kitchen Xchange was prepared to pay and gave reasons for paying less than the amount claimed.

 

On 23 June 2014 Formacon served a further payment claim on Kitchen Xchange, dated 20 June 2014, which claimed an amount approximately $15,500 more than the amount claimed in the Second Payment Claim ("Third Payment Claim").

 

Kitchen Xchange did not serve a payment schedule in response to the Third Payment Claim and also did not serve a payment schedule in response to a section 17(2)(a) notice served by Formacon under the Act.

Payment claim for fitout work referred to adjudication

Formacon applied for adjudication of the Third Payment Claim.

 

The adjudicator determined in his adjudication determination that Formacon was entitled to payment of the amount claimed in the Third Payment Claim, except for a claimed variation in the amount of $10,400.

 

Kitchen Xchange commenced proceedings in the Supreme Court of NSW and sought relief in the nature of certiorari to quash the adjudication determination.

Reference date of payment claims and absence of supporting statements

The key questions to be considered by the Supreme Court were, first, whether contrary to section 13(5) of the Act, the Third Payment Claim was served in respect of the same reference date as the Second Payment Claim.

 

The second question to be considered was the legal effect of Formacon’s failure to serve an accompanying supporting statement with the Third Payment Claim.

Second Payment Claim not withdrawn so Third Payment Claim not properly served

In relation to the reference date issue, his Honour McDougall J found as follows:

• The relevant reference date for Formacon to claim a progress payment under the contract was either 31 May 2014 or 4 June 2014 (having regard to the definition of "completion" in the construction contract and the fact that the last of the four instalments was payable on "completion"). 
• Having regard to the decision of his Honour Hammerschlag J in NC Refractories Pty Limited v Consultant Bricklaying Pty Limited [2013] NSWSC 842, it is open to a claimant, with the consent of the respondent, to withdraw a payment claim and substitute another payment claim without contravening section 13(5) of the Act (which prohibits the service of more than one payment claim in respect of each reference date).
• Although the First Payment Claim was withdrawn following discussions between Kitchen Xchange and Formacon, there was no evidence to support a finding that the Second Payment Claim was withdrawn before the Third Payment Claim was served (contrary to the submission of counsel for Formacon that his Honour should conclude that the Second Payment Claim had been withdrawn). Something must be said or done by a claimant from which the respondent is able to understand that a payment claim is not being relied upon.
• As the Second Payment Claim was not withdrawn, the Third Payment Claim was not properly served, as it was served in breach of section 13(5) and the adjudicator did not have jurisdiction to determine Formacon's adjudication application.

Lack of supporting statement renders service of payment claim ineffective

In relation to the supporting statement issue, his Honour McDougall J found as follows:

• None of Formacon's payment claims were accompanied by the supporting statement (relating to payment of subcontractors) required by section 13(7) of the Act (which came into force on 21 April 2014).
• Section 13(7) of the Act is intended to prohibit service of a payment claim by a head contractor without the requisite supporting statement. Service by a head contractor of a payment claim without an accompanying supporting statement does not render the payment claim itself invalid, but renders service of the payment claim ineffective.

Adjudicator did not have jurisdiction as payment claim not validly served

The Court concluded that as service by a claimant of a payment claim on a respondent is a basic and essential requirement for a valid adjudicator's determination and as it has been recognised that basic and essential requirements may be equated with essential preconditions for exercise of jurisdiction, the Third Payment Claim was not validly served by Formacon and the adjudicator did not have jurisdiction to determine Formacon's adjudication application.

Court will quash a determination where more than one payment claim is served in respect of the same reference date and where a payment claim is served by a head contractor without an accompanying supporting statement

On the basis of the jurisdictional errors found, McDougall J ordered that the adjudicator's determination in respect of the Third Payment Claim be quashed.

 

This decision provides guidance for parties affected by the introduction of the head contractor supporting statement requirements (which commenced on 21 April 2014), in that it clarifies that a head contractor payment claim purported to be served without the requisite supporting statement will be considered not to be have been validly served. 

 

This decision also reinforces the established position under the Act that a claimant will not be permitted to rely upon a second or subsequent payment claim in respect of the same reference date unless it can be established that earlier payment claim(s) have been validly withdrawn.