Can a letter of demand constitute a payment claim?

EXECUTIVE SUMMARY

Total Construction Pty Ltd v Kennedy Civil Contracting Pty Ltd (subject to a Deed of Company Arrangement) [2023] NSWCA 306 concerned a case as to whether letters of demand, could constitute a payment claim pursuant to s13 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act).

The New South Wales Court of Appeal held that a letter of demand could act as a payment claim if it met the requirements of the Act. This case is an important reminder to be meticulous in preparing payment claims and ensure that all requisite elements are satisfied.

WHAT HAPPENED?

The proceedings related to a construction contract between Kennedy Civil Contracting Pty Ltd (Kennedy Civil) and Total Construction Pty Ltd
(Total Construction) for works in Arndell Park, NSW (Contract).

In early August 2022, Kennedy Civil was placed into administration and served a payment claim on Total Construction under the Contract. Total Construction responded with a payment schedule certifying a negative amount.

On 25 October 2022, the solicitors for Kennedy Civil’s administrator issued a letter of demand to Total Construction (October Letter). Total Construction did not serve a payment schedule in response to the October Letter, and so Kennedy Civil submitted that, because the October Letter was a payment claim under the Act, they were owed the full amount claimed in the October Letter. Conversely, Total Constructions argued that the October Letter had failed to comply with ss13(2) and 13(6)(b) of the Act.

Pertinently, the October Letter:

1. did not state it was a payment claim made under the Act;
2. demanded payment of $545,353.18, which was “indebted” to Kennedy Civil, within 5 business days;
3. enclosed numerous invoices, each of which were dated long in the past and stated they were a payment claim made under the Act;
4. asked for payment to be made in the firm’s trust account rather than direct payment to Kennedy Civil (which had been the process for payment throughout the project);
5. stated that, if payment was not made, Kennedy Civil would commence proceedings by way of statutory debt pursuant to ss15 or 16 of the Act; and
6. urged Total Construction to resolve the matter early “without the need for further recovery action“.

DECISION

In Brookhollow Pty Ltd v R&R Consultants Pty Ltd and Anor [2006] NSWSC 1 (Brookhollow), the Supreme Court of New South Wales affirmed that payment claims are invalid where they fail to reasonably purport, on their face, to comply with the requirements of s13(2) of the Act.¹

Referring to Brookhollow, the Court held that the October Letter, when read objectively, was not a payment claim but a demand for payment of a debt.
This was on account of the following features which are generally absent from payment claims:

1. references to Total Construction being “indebted” to Kennedy Civil;²
2. the suggestion that a failure by Total Construction to settle this debt would result in Kennedy Civil commencing recovery action;³
3. the demand to make payment before the “Deadline“, being 5 business days (which is notably less than the period specified under the Act for payment schedules to be served);⁴
4. the annexed invoices being of a historical nature (as evidenced by the invoice dates, which had long since passed, and the payment details);⁵ and
5. only one invoice containing a detailed description of the construction work undertaken (for instance, one invoice had the following description: “Contract works to date“).⁶

Evidently the inclusion of the wording: “This is a payment claim made under the Building and Construction Industry Security of Payment Act 1999 NSW”
in each invoice was not sufficient for the October Letter to constitute a payment claim.⁷

The Court emphasised that the proper approach to use in determining whether a document constitutes a payment claim is one that is fair and involves reading all documents objectively and as a whole, for which context cannot be a substitute.⁸

IMPLICATIONS

This decision stresses the importance of preparing payment claims that strictly comply with the requirements set out in s13(2) of the Act. Pursuant to the Act, a payment claim must:

1. identify the relevant construction work carried out;
2. detail the amount due; and
3. have wording to the effect that the claim was made under the Act.

While the October Letter did not strictly comply with the requirements set out in s13(2) of the Act in this instance, the Court stated that a letter of demand could, in theory, constitute a payment claim if the necessary elements are satisfied.

If you would like any further information about this case or assistance with any security of payment queries, please don’t hesitate to contact us.

This article was written by Alan Chiang, Partner, Chris Kipouridis, Associate, Oli Keats, Solicitor and Brooke Jamieson, Law Graduate.

¹Brookhollow Pty Ltd v R&R Consultants Pty Ltd and Anor [2006] NSWSC 1, [30].
²[2006] NSWSC 1, [29(3)].
³[2006] NSWSC 1, [29(7)-(8)], [31].
⁴[2006] NSWSC 1, [29(4)].
⁵[2006] NSWSC 1, [32], [33].
⁶[2006] NSWSC 1, [32], [34].
⁷[2006] NSWSC 1, [33], [34].
⁸[2006] NSWSC 1, [35], [38].