Share it Fairly but don’t Take A Slice of My Pie!

This has been a key theme in the building and construction industry over recent years. The Building and Construction Industry Security of Payment Act 2009 (SA) (“the Act”) was introduced to implement a quick and inexpensive system for the building and construction industry to enable subcontractors and suppliers to claim money which is allegedly owing to them on a “pay now, argue later” scheme. But what happens if the entity making the claim becomes insolvent, ceases trading and has insufficient assets to pay back the amounts paid to it? The Act necessitates payment being made when claimed, with the payee able to later argue whether the payments are in fact payable. As Pink Floyd said – share it fairly but don’t take a slice of my pie.  This particular issue was discussed in the recent case of Hamersley Iron Pty Ltd v James [2015] WASC 10.

The Issue

Earlier this year, the Western Australian Supreme Court considered whether an adjudication determination made under the Construction Contracts Act 2004 (being the Western Australian equivalent to the Act) could be enforced by an insolvent company.

Hamersley Iron Pty Ltd (“Hamersley”) objected to the enforcement of an adjudication determination made under the Act on the basis that:

1. it had a counterclaim against Forge Group Construction Pty Ltd (In Liquidation) (“Forge”) which exceeded the amount awarded to Forge in the determination; and
2. it was entitled to set off this amount against monies that it owed to Forge under section 553C of the Corporations Act 2001 (Cth) (which relates to set offs in the context of insolvent companies).

Factors Considered and the Ultimate Determination

The Western Australian Supreme Court noted that the existence of a counterclaim against the party seeking to enforce an adjudication determination will not be a basis for the Court to refuse leave to enforce the same under section 43 of the Construction Contracts Act 2004. However, due to the insolvency of Forge, His Honour Justice Beech considered the relationship between the purpose of the Construction Contracts Act 2004 (which is similar to the purpose of the Act) and the Corporations Act 2001 and found that the purpose and object of section 553C of the Corporations Act 2001 required the Court to do “substantial justice” between the parties. In contrast to the finding made by the adjudicator, Justice Beech was satisfied that Hamersley’s evidence in relation to its counterclaim established that it had an arguable case against Forge.

With reference to the High Court Authority of Gye v McIntyre (1991) 171 CLR 609, the Western Australian Supreme Court held that it would be unfair for the Liquidators of Forge to recover the full amount of Hamersley’s debts to Forge in circumstances where Hamersley was left to prove in the liquidation in respect of the debts owed by Forge to Hamersley due to the counterclaim.

This position has also been adopted in Victoria and New South Wales.^[1]

How does this Affect You?

A Court is likely to refuse leave to enforce an adjudication determination given under the Act when:

1. the successful adjudication applicant is insolvent, and in liquidation, at the time that it applies for adjudication of the relevant payment dispute; and
2. an adjudication respondent is able to establish that it has an arguable counterclaim against the applicant that exceeds the amount of the adjudicated sum.

If you are a Liquidator of an insolvent company, or you work in the building and construction industry and have received correspondence from a Liquidator which seeks to make a claim (or enforce an adjudication) pursuant to the Act, please contact our Dispute Resolution & Insolvency team for assistance.