Two recent decisions have highlighted the importance of setting out proper reasons for withholding payment in a payment schedule. Those decisions are the Supreme Court of Appeal decision in Witron Australia Pty Ltd v Turnkey Innovative Engineering Pty Ltd [2023] NSWCA 305 (‘Turnkey’) and the New South Wales Court of Appeal decision in Ceerose Pty Ltd v A-Civil Aust Pty Ltd [2023] NSWCA 215 (‘Ceerose’).

What is a payment schedule?

A payment schedule is a written notice served on a claimant who has served a payment claim made under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act).

When does it need to be served?

A payment schedule is generally only served when the respondent disputes the amount claimed and does not intend to pay the full amount of the payment claim by the due date for payment. Reasons for non-payment can include, alleged defective or incomplete works, set-off claims, contract disputes regarding variations.

There are strict timeframes for serving a payment schedule. Under the Act, a payment schedule must be served within the earlier of:

• the time required under the relevant contract; and
• ten (10) business days of the date of receipt of a payment claim.

If the contract makes no provision for the giving of a payment schedule, the 10 business day period will apply.

What does a valid payment schedule need to include?

A valid payment schedule must:

• identify the payment claim to which it relates; and
• indicate the amount of the payment (if any) the respondent proposes to make (scheduled amount).

Additionally, if the scheduled amount is less than the amount of the payment claim, the payment schedule must indicate why the scheduled amount is less than the claim, and if the respondent is withholding payment of the full amount of the claim for any reason, the reasons for withholding payment.

Case Analysis – Ceerose

Ceerose, a building contractor, had been served with payment claims by its subcontractor A-Civil in respect of two developments, one in York Street Sydney and another in Elizabeth NSW. Ceerose served a payment schedule disputing the claims and setting out its reasons for disputing payment. A-Civil subsequently applied for adjudication under the Act and Ceerose filed an adjudication response in those proceedings. The adjudicator determined Ceerose was liable to pay A-Civil $2,045,453.97 for the York Street development and $349,324.36 for the Elizabeth development. Ceerose commenced proceedings in the Supreme Court seeking orders to set aside both determinations on the grounds of jurisdictional error. The primary judge found jurisdictional error in both determinations but held it was only necessary to set aside the affected parts of the determinations. Ceerose appealed on the basis that further parts of the determinations should have been set aside. A-Civil cross-appealed, including on the apportioning of the adjudicator’s costs.

Two issues before the primary judge were as follows:

• what is the scope of an Adjudicator’s “duty to consider” under the Act?
• under the Act, does an adjudicator fall into jurisdictional error if they fail to investigate the ‘true merits’ of each sum claimed or the ‘trust construction’ of the contract?

As to the first issue, the Court confirmed the only matters an Adjudicator must consider in making a determination are those prescribed by section 22(2) and that the Adjudicator is only entitled to consider submissions that are duly made by the parties in support of the claim.

On the second issue, and in overturning previous lines of authority, the Court held that if a payment schedule fails to set out reasons for withholding payment of a payment claim, or where a payment schedule includes reasons for withholding payment but the Adjudicator rejects those reasons, the Adjudicator is entitled to accept the Claimant’s claim in full without further investigation of the merits of the claim. In reaching this conclusion, the Court noted the statutory limit under clause 20(2B) of the Act which prevents a respondent from raising reasons for withholding payment at adjudication unless the respondent included such reasons in the payment schedule.  The Court of Appeal affirmed that the task of the adjudicator is to determine the dispute within the parameters of the Act and the limited material the parties are entitled to submit under the Act. In essence then, a payment schedule is critically important as it sets the scope of the dispute and matters to which the adjudicator may have regard when making a determination.

The Court of Appeal ultimately held that the Adjudicator was not obliged to consider the reasons Ceerose gave for withholding payment at adjudication where they were not outlined in the payment schedule.

On the issue of jurisdictional error and an adjudicator’s costs, the Court of Appeal affirmed an adjudicator is entitled to be paid for adjudicating and adjudication application within the prescribed time, even where that determination is later set aside for jurisdictional error.

Case Analysis – Turnkey

In the case of Witron Australia Pty Ltd v Turnkey Innovative Engineering Pty Ltd [2023] NSWCA 305, the Appellant Witron Australia Pty Ltd (Witron) contracted the Respondent, Turnkey Innovative Engineering Pty Ltd (Turnkey) to carry out certain electrical installation works.

Turnkey submitted a Payment Claim for the sum of $804,154.63. The claim was divided into two components which were separately identified, the first being a $499,924.63 claim for “base contract works”, and the second was a claim of $304,230.00 for “contract variation works”.

Witron responded to the payment claim in an email stating “we will review your variations and your new pricing after we see real progress on the handing over of GC” and suggested that a claim could be resubmitted to not include any variation works. Witron argued that the email constituted a payment schedule for the purposes of s 14 of the Act.

That argument was rejected by the primary judge, with the Court noting that whilst the email did not contain a figure, it referenced the payment claim and sufficiently indicated that no payment would be made. However, the Court noted that no reasons were provided for rejecting a variation claim comprising approximately 40% of the payment claim. The Court held that it is not sufficient for a payment claim to address part of the claim and not the whole of the claim. The Court reasoned that the purpose of a payment schedule is to identify what amounts are disputed and why. As the respondent’s email did not provide any reasons for withholding payment of the entirety of the claim, it was an invalid payment schedule for the purposes of section 14(3) of the Act, entitling the Claimant to enforce the payment claim under sections 14(4) or 15(2)(a)(i) of the Act.

Witron subsequently appealed this decision.

The Court of appeal dismissed the appeal and upheld the original decision of the Primary Judge. In dismissing the appeal, the Court of appeal found as follows:

As to the requirements of a payment schedule:

• There are 3 criteria for a document to be characterised as a payment schedule for the purposes of s 14 of the Act:
  • that it identifies the payment claim to which it relates
  • that it indicates the amount of the payment (if any) that the respondent proposes to make; and
  • that it indicates why the payment that the respondent proposes to make is less than the amount claimed, that is, the reason or reasons for the amount claimed not being payable in whole or in part.
• A payment schedule need not be a formal document and need not identify itself as a payment schedule. The requirements in s 14 are undemanding, although vague & generalised objections to payment will not suffice. What is sufficient is to be assessed in a purposive manner, taking account of the significance of the payment schedule in the statutory scheme.
• A failure to address some distinct component of a payment claim may not be significant when viewed in context. It might still be possible to say that in substance the response had given reasons indicating why the scheduled amount was less than the amount claimed, sufficiently to enable the claimant to make a decision whether or not to pursue the claim and to understand the nature of the case it will have to meet in an adjudication. However, in general a failure to provide any reason or reasons directed to a distinct and substantial component of a payment claim will constitute a failure sufficiently to indicate why the scheduled amount is less than the amount claimed for the purposes of s 14(3) of the Act.

As to whether the email sufficed to meet the statutory requirements:

• The email indicated that Witron was not proposing to make any payment on the progress claim served. Thus, the email did give a reason for not paying the claim insofar as it was based on the “Base contract works”.
• However, Witron gave no reasons answering the distinct and substantial component of the claim relating to variation works. Witron’s email stating that “we will review your variations” once progress had been achieved meant that Witron refused to consider the full claim made. Insofar as it is a reason at all, it does not constitute a reason of the kind required by s 14(3)

Takeaways

As Ceerose and Turnkey highlight, it is critically important to ensure that if there is any dispute over an amount claimed, the payment schedule should outline ALL reasons for non-payment to ensure the best chance of success if the dispute proceeds to adjudication.

Keystone Lawyers are experts in Security of Payment legislation across various Australian States and can assist in reviewing payment claims, drafting payment schedules and advising on general strategy when it comes to the adjudication process.