Payment Claims Under Security of Payment Act

Must Payment Claims Under the Security of Payment Act Relate Directly to Construction Work?

Although the answer might appear obvious, a recent decision held by the New South Wales Court of Appeal in EnerMech Pty Ltd v Acciona Infrastructure Projects Australia Pty Ltd & Ors [2024] NSWCA 162 ruled that a valid payment claim under the Security for Payments Act does not need to be directly related to “construction work”, overturning this long-standing view.

This decision impacts the interpretation of payment claims under the Security for Payments Act and broadens the scope of what may be sought in a payment claim. As determined in this decision, where a party to a construction contract has wrongfully drawn on security, the affected party may seek to recover the security in a payment claim under the Security for Payments Act.

Background: The WestConnex Project and Disputed Payment

Three (3) parties, including Acciona, formed a joint venture tasked with delivering Stage 3 of the WestConnex project, which is estimated to have an estimated value of around A$3.9 billion. In June 2020, EnerMech entered into a subcontract agreement with the joint venture to provide electrical installation services as part of the WestConnex project.

EnerMech issued an A$10 million payment claim to Acciona, with approximately A$9 million related to amounts secured by a bank guarantee provided by EnerMech, which Acciona had called upon. Acciona served a payment schedule indicating that there was no outstanding amount to be paid. EnerMech submitted an adjudication application, and the adjudicator ruled in its favour.

In the first instance, Acciona commenced proceedings to contest the validity of the payment claim, arguing that the claim failed to pertain to construction work or related services pursuant to sections 8 and 13(2) of the Security for Payments Act. The primary judge upheld Acciona’s claim and held that the payment claim was invalid.

EnerMech appealed the ruling to the Court of Appeal.

Court of Appeal Ruling: Broader Interpretation of Payment Claims

The Court of Appeal ruled that the Security for Payments Act does not require a payment claim to be strictly “for construction work” and determined that a payment claim is valid if it claims money owing on an account under a construction contract, regardless of whether the claim relates directly to construction work.

This ruling means that, as in the above case, a bank guarantee that has been wrongfully called upon can be included in payment claims under the Security for Payments Act. The Court also emphasised that these issues are within the adjudicator’s scope to resolve.

Key Sections of the Security of Payment Act Considered

The Court of Appeal clarified that the construction contract is the central focus, with the statutory right to progress payments being an additional factor.

The decision upheld that the amount of progress payments due is determined by the contract terms under section 9 of the Security for Payments Act, which provides that a party’s right to a progress payment is determined by reference to terms of the construction contract.

If these terms become unclear, section 10(1)(b) of the Security for Payments Act provides a statutory fallback, under which the amount of a progress payment may be calculated in respect to the value of construction work carried out. This ensures that progress payments can be quantified in circumstances where contract terms are vague.

The decision clarified that section 13(1) of the Security for Payments Act, which allows a person who has undertaken construction work to make a payment claim, does not limit the amount or type of payments a party can claim, nor does it impose conditions on the validity of a payment claim. Additionally, payments should not be divided on the basis of their type or nature, irrespective of the contract terms; instead, all payments should be included in a payment claim.

The Court ordered Acciona to pay EnerMech the adjudicated sum of approximately A$10 million.

Adjudicator’s Role vs Court Jurisdiction in Payment Claims

EnerMech contended that, determining whether a payment claim needed to be “for construction work” was not a fact for the Court to decide, but rather for a question for the adjudicator.

The Court of Appeal clarified that a decision made by an adjudicator may only be set aside where the Court finds jurisdictional error. Even where legally incorrect, an adjudicator’s interpretation of the construction contract cannot be contested during the enforcement of an adjudication certificate or through judicial review.

The Court’s role is not to infer an essential condition for the validity of a payment claim, especially if such an implication would weaken the impact of the adjudication determination.

Key Takeaways

1. This ruling clarifies and broadens the scope of what can be included in payment claims under the Security for Payments Act.
2. The judgement confirms that a payment claim can be made seeking to recover amounts from a principal or head contractor which has wrongfully called upon a bank guarantee.
3. Principals and head contractors, on the other hand, should:
   • Consider the ramifications of seeking recourse to security under a construction contract, as the amount could be contested in future payment claims; and
   • Present any jurisdictional arguments regarding the legitimacy of a payment claim in both their payment schedule and adjudication response.
4. The decision further reinforces the role of the adjudicator in resolving disputes over payment claims, limiting the scope for Courts to review adjudicators’ decisions unless there is a jurisdictional error.

How can Madison Marcus help you?

At Madison Marcus, our Construction & Infrastructure team stays at the forefront of legal developments like this to provide clear, commercial advice on project delivery, risk allocation, and payment security. Our Commercial Litigation division offers strategic and robust representation in disputes, ensuring clients’ interests are protected from initial claims through to court appeals if needed.

If you’re facing a dispute or seeking advice on your rights under the Security of Payment Act, Madison Marcus has the expertise to guide you through.