Court of Appeal holds payment schedule must answer each distinct and substantial component of payment claim

The NSW Court of Appeal has upheld a decision involving the validity of payment schedules under the Building and Construction Industry Security of Payment Act 1999 (NSW).

In Witron Australia Pty Ltd v Turnkey Innovative Engineering Pty Ltd [2023] NSWCA 305, the Court of Appeal reinforced the NSW Supreme Court's decision that an email sent by the head contractor in response to the contractor's payment claim did not constitute a valid payment schedule.

It means that a payment schedule must provide reasons that answer each distinct and substantial component of a payment claim in order to be valid.  Accordingly, if the scheduled amount is less than the claimed amount, respondents must ensure the payment schedule contains sufficient reasons addressing the substance of what is claimed to avoid invalidity. An invalid payment schedule can result in a statutory debt for the full amount of the payment claim.

Thomson Geer successfully acted for the contractor making the payment claim in this case.  Thomson Geer's article on the NSW Supreme Court's decision can be accessed here.

When a payment schedule will be invalid

The Court of Appeal considered whether or not an email sent by the head contractor that relevantly stated "we will review your variations" in response to a payment claim was a valid payment schedule. The relevant payment claim included claims for variations amounting to some 40 per cent of the overall claim.

Consistent with the NSW Supreme Court, the Court of Appeal held that a valid payment schedule must address each distinct and substantial component of a payment claim given the significance of the payment schedule in the statutory scheme.  In particular, the function of a payment schedule to identify the parameters of the dispute, to allow the claimant to make an informed decision as to how to proceed, and to allow the adjudicator to identify what reasons could be raised in the adjudication response.  

If a purported payment schedule failed to address each distinct and substantial component of a payment claim, the Court of Appeal considered that the functions of the payment schedule could not be fulfilled.

In addition, the Court of Appeal found that the issue of sufficiency of reasons is to be assessed purposively.  That is, taking account of the fact that the purpose of giving reasons is to apprise the parties of the real issues in dispute.

Relevantly, the Court of Appeal reasoned that by saying “we are not going to consider paying this until you do X” is to refuse to grapple with the claim made. It is not saying the claim is not payable.  Rather, it is declining to consider whether or not that is so until another condition is met.  As it does not apprise the parties of the real issues in dispute, it is not a sufficient reason for withholding payment.

Accordingly, the Court of Appeal held that the head contractor's email could not be characterised as a payment schedule as it did not respond with sufficient reasons to a distinct component of the payment claim, the variations.  

Going forward

To avoid invalidating a payment schedule, principals and head contractors must ensure that the payment schedule responds to each distinct and substantial component of the payment claim for which the scheduled amount is less than the claimed amount.  

In addition, any reasons for withholding payment must be sufficient to apprise the parties of the issues in dispute.  

In providing reasons it is useful guidance that, “we do not intend to pay your claim” or “we will not pay your claim until …” will not constitute a sufficient reason.  However, a sufficient reason would be “we are not going to consider paying this until you do X because under the contract X is required before such a claim is made”.

For more information or assistance with security of payment claims, contact our Construction and Infrastructure team.

Authors

Simon Ralton | Partner | +61 2 8248 3426 | sralton@tglaw.com.auj

Divya Chaddha | Senior Associate | +61 2 8248 3473 | dchaddha@tglaw.com.au

(With assistance from Clerk Isaac Chung)