Take-out won’t take away a right to payment
Parrwood Pty Ltd v Trinity Constructions (Aust) Pty Ltd  NSWCA 172
The New South Wales Court of Appeal recently handed down its decision in Parrwood Pty Ltd v Trinity Constructions (Aust) Pty Ltd. The Court of Appeal upheld a finding at first instance that, where a reference date had arisen under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act), a claimant’s entitlement to payment was not suspended by the respondent subsequently issuing a notice to take works out of the claimant’s hand after that reference date had accrued.
The decision sought to clarify the seminal words of the High Court in Southern Han, relating to the effect of suspension on reference dates under the Security of Payment legislation. The decision also affirms the principle that a party is not able to take steps under a contract to ‘invalidate’ reference dates that have already accrued.
The decision supports the long-held principle that, absent a challenge to jurisdiction, an adjudicator must fulfil his or her function by making a determination. An adjudicator cannot ‘decline’ to do so on the basis that a right to payment (as opposed to a reference date) has not yet arisen.
In light of the decision of Parrwood, principals and head contractors should be aware that where rights under the Act have accrued prior to take out action, a Contractor will be entitled to payment (subject of course to the merits of their claim).
Parrwood Pty Ltd (Parrwood), as principal, and Trinity Constructions (Aust) Pty Ltd (Trinity Constructions), as contractor, were parties to a design and construct contract for a residential development. Under the contract, Trinity Constructions was permitted to submit payment claims to be made on the 25th day of each month.
Following the accrual of the August 2019 reference date but prior to Trinity Constructions submitting a payment claim in respect of that date, Parrwood served a notice on Trinity Constructions taking the remaining works out of Trinity Constructions’ hands but not terminating the contract (Take-Out Notice). There was no dispute as to the validity of Parrwood doing so. Under the contract, the effect of the Take-Out Notice was that Trinity would be entitled to an ‘adjustment payment’ following the work being completed by another subcontractor.
Following the Take-Out Notice, Trinity Constructions issued a payment claim to Parrwood and then proceeded to adjudication (First Adjudication).
The adjudicator found that the amount owing to Trinity Constructions was ‘no amount’. He did so on the basis that prior to service of the payment claim, Parrwood had taken the work out of Trinity Constructions’ hands and therefore, payment to Trinity Constructions could be suspended until its entitlements following the Take-Out Notice had been assessed by the Superintendent. The adjudicator made a number of statements in the determination, to the effect that he was ‘declining to make a determination’ on the basis that the payment claim was premature: that is, Trinity’s right to payment would not arise until the ‘adjustment payment’ was due.
Trinity Constructions subsequently withdrew the First Adjudication and made a new adjudication application. The second adjudicator found that:
(a) the adjudicator in the First Adjudication had failed to perform his statutory function because he had declined to determine the amount of the payment claim; and
(b) there was an amount owing to Trinity Constructions by Parrwood in respect of the payment claim,
(the Second Determination).
Parrwood then proceeded to Court to challenge the validity of the Second Determination.
The primary judge (Justice Ball) dismissed Parrwood’s summons and declared that the determination of the First Adjudication was null and void. In doing so, his Honour made the following observation with respect to the effect of contractual suspension on rights accruing under the Security of Payment legislation in light of the decision of Southern Han:
The point made by the High Court was that no reference date and no right to a progress payment could be pursued after suspension. It was not saying that no right could arise under the Act in respect of a right to a progress payment that arose before suspension. The right to make a payment claim in this case was such a right.
Parrwood subsequently appealed to the Court of Appeal.
The Court of Appeal found that the determination of the First Adjudication was vitiated by jurisdictional error as the adjudicator had failed to perform his function as prescribed by section 22(1)(a) of the Act. The basis of the Court’s finding was that the adjudicator’s reasons made it plain that he did not determine the adjudicated amount on the basis that the Take-Out Notice had been served and therefore, concluded that ‘no amount’ was payable.
The Court subsequently went on to find that on and from 25 August 2019, being the date that a reference date had accrued under the Act, Trinity Constructions enjoyed a statutory entitlement to submit the payment claim, which it was entitled to do so for the succeeding 12 months. This was notwithstanding that Parrwood had exercised its rights under the contract and served the Take-Out Notice, as the right to serve the payment claim had accrued prior to Parrwood doing so.
The Court of Appeal also found that as the determination of the First Adjudication was void, there was no obligation on Trinity Constructions to ‘approach a court’. Therefore, it was not precluded from exercising its statutory right and making the second adjudication.
For further information on the decision in Parrwood and related considerations for your project, please contact our Construction team below.
Special thanks to Cameron Baker for his assistance in putting this article together.
  NSWCA 172.
 Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd (2016) 260 CLR 340  HCA 52.
 Parrwood Pty Ltd v Trinity Constructions (Aust) Pty Ltd  NSWCA 172, .
 Ibid, .
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