Construction contracts typically require contractors and subcontractors to submit, as part of any payment claim, a statutory declaration certifying that all money due and payable to its subcontractors and suppliers in relation to the works have been paid.  This condition is often expressed as a precondition of payment or a mandatory requirement under the contract.  There are a number of good reasons why, from a commercial perspective, this requirement is in place.  However, any such contractual provision that purports to modify or restrict the circumstances in which a person is entitled to a progress payment would likely be void under s34 of the Building and Construction Industry Security of Payment Act 1999 (SOP Act), as held in the recent decision of J Hutchinson Pty Ltd v Glavcom Pty Ltd [2016] NSWSC 126.

Background

Hutchinson, as the head contractor, engaged the Subcontractor to carry out the design, fabrication and installation of joinery at the Bondi Pacific, a new residential and commercial redevelopment on the site of the former Swiss Grand Hotel at Bondi Beach.  The Subcontractor submitted a payment claim on 23 November 2015 seeking $2,948,510.80. The payment claim included, amongst other things, a statutory declaration signed by Mr Callipari, the sole director of the Subcontractor, in the form prescribed by the Subcontractor.

The subcontract provided, at clause 37.1, that the Subcontractor shall “as a precondition to payment of any progress claim and the final payment claim” give the head contractor a document in the form set out in various annexures to the subcontract “declaring that the Subcontractor’s employees, workers, secondary subcontractors and suppliers who at any time have been employed by the Subcontractor on WUS have at the date of the claim been paid all money due and payable to them in respect of the employment on WUS.”

Hutchinson submitted a payment schedule stating the amount owing as -$6,322,578.96. Hutchinson maintained that it was entitled to set off against the amount claimed by the Subcontractor an amount of $4,325,200.00 in liquidated damages for delay in completing the work.  The dispute subsequently went to adjudication under the SOP Act, with the Adjudicator ultimately making a determination in favour of the Subcontractor in the sum of $1,263,399.72 plus GST.

J Hutchinson Pty Ltd v Glavcom Pty Ltd [2016] NSWSC 126

Hutchinson commenced proceedings seeking to set aside the adjudication determination made under s22 of the SOP Act.  Hutchinson’s primary submission was that the statutory declarations submitted with the payment claim, and subsequently submitted as part of the adjudication application, were false (and turned out to be false).  Hutchinson contended that:

  • the Subcontractor included with its payment claim a statutory declaration required by the subcontract stating that all payments made to, on behalf and in respect of Subcontractor’s workers engaged on the project had been paid which was “knowingly false”.
  • alternatively, Hutchinson contended that the Subcontractor put forward and maintained the statutory declaration with “reckless indifference to the truth or falsity of the representations made on the face of the declaration” that workers’ compensation insurance premiums had been paid.

On these grounds, amongst others, Hutchinson contended that the adjudication determination was voidable.

Hutchinson led evidence at the hearing which demonstrated that the Subcontractor had not, contrary to the assertions set out in the supporting statutory declarations, paid its workers compensation insurance premiums for the relevant period.  The evidence was not disputed.  The Court noted that Hutchinson was not aware of those facts until about 3 February 2016, after the Adjudicator’s determination was handed down.

Hutchinson relied upon the following passage in Brodyn Pty Ltd v Davenport [2004] NSWCA 394; (2004) 61 NSWLR 421 at [60] per Hodgson JA in support of its contention:

If there is fraud of the claimant in which the adjudicator is also involved, the determination will be void because the adjudicator has not bona fide attempted to exercise the power. If the determination is induced by fraud of the claimant in which the adjudicator is not involved, then I am inclined to think that the determination is not void but voidable; and it is liable to be set aside by proceedings of the kind appropriate to judgments obtained by fraud.

Subcontractor’s response

The Subcontractor challenged Hutchinson’s submissions on two grounds.  Firstly, the Subcontractor contended that the statutory declaration would only be false if, at the time Mr Callipari signed the declaration “Mr Callipari knew that the workers’ compensation payments had not been made (to the best of his knowledge and belief) or was recklessly indifferent to that fact.”

Evidence was given by the director of the Subcontractor company, to the effect that the director:

  • did not know “at the time he signed the statutory declaration that it was false.”
  • did not handle the Subcontractor’s administration or prepare its paperwork; that was done by others.
  • before signing the statutory declaration “skimmed” through the document before he signed it and that he assumed that it was correct because he “expected the person responsible for preparing it and giving it to him to alert him if it was not.”
  • was not aware that the workers’ compensation premium had not been paid until 2 February 2016; as soon as he became aware of that fact, he arranged for it to be paid.

Secondly, the Subcontractor contended that, even if the statutory declaration did not comply with the requirements of the subcontract, it was not material to the Adjudicator’s determination.  The Subcontractor submitted that the relevant subcontract provisions requiring the statutory declaration void under s34 of the SOP Act.  Subsection 34(2) provides:

34(2) A provision of any agreement (whether in writing or not):

(a) under which the operation of this Act is, or is purported to be, excluded, modified or restricted (or that has the effect of excluding, modifying or restricting the operation of this Act), or(b) that may reasonably be construed as an attempt to deter a person from taking action under this Act,

is void.

The Subcontractor contended that the subcontract provisions dealing with the statutory declarations were effectively void, as they sought to modify or restrict the operation of the Subcontractor’s entitlement to receive progress payments under the SOP Act.

Findings

In relation to the falsity or otherwise of the statutory declaration, the Court was not satisfied that the director of the Subcontractor knew that the workers’ compensation premium had not been paid, or was recklessly indifferent to whether such payments had been made.  The Court observed:

[21] … Given the size of the business it was reasonable of Mr Callipari to rely on others who to his knowledge knew or could be expected to know the relevant facts. Consequently, when he swore in the statutory declaration that he was in a position to know the truth of the statements contained in the statutory declaration and that to the best of his knowledge and belief workers compensation premiums had been paid, in my opinion, he was entitled to rely on what he was told by others who were involved in the administration of the company and could be expected to know the relevant facts. The statement that he was in a position to know the relevant facts did not require him to undertake his own investigation of the matter.

The Court also had regard to the gravity of the matters alleged, in this case, the extent of the debt in question – being the unpaid workers’ compensation.  The Courted cited s140(2)(c) of the Evidence Act 1995 (NSW) and Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-2 per Dixon J.  The Court found that “although the amount of the workers compensation premium is significant, it is not large compared to the total turnover of Glavcom.”

In relation to the Subcontractor’s second argument, the Court agreed that, irrespective of the position one might take regarding the falsity or otherwise of the statutory declaration, the statutory declaration “was irrelevant to the Adjudicator’s determination.”

The Court turned to s8 of the SOP Act, observing that this section gives a person who performs construction work, or provides related goods and services, under a construction contract “a right to receive a progress payment on each reference date, which is a date determined in accordance with the contract or a date fixed by s8(2)(b).”  The Court went on to observe that s8 of the SOP Act cannot be interpreted in such a way that would permit “other conditions” to be attached to that fundamental right to payment.

[26] … Any provision that purported to do so would be a provision that sought to modify or to restrict the circumstances in which a person was entitled to a progress payment and would therefore be void under s 34.

The Court held that the apparent purpose, in this case, of the requirement to supply a statutory declaration in the form prescribed by the subcontract was to “make the payment of progress payments conditional on the payment” by the Subcontractor of workers’ compensation premiums.  The Court held that the requirement was an “additional condition” imposed upon the right to obtain a progress payment, and thus void pursuant to s34 of the SOP Act.