Executive summary
The County Court decision on 28 July 2021 of Emery t/as Yarra Valley Commercial v J. Hutchinson Pty Ltd1 concerned J. Hutchinson Pty Ltd (Hutchinson), a builder, who had engaged Yarra Valley Commercial (YVC), a subcontractor, to supply and install joinery works at an apartment complex in South Melbourne. YVC served a payment claim and after Hutchinson failed to pay the scheduled amount, YVC sought judgment under s17(2) of the Building and Construction Industry Security of Payment Act 2002 (Vic) (Act).
The case raises two issues of interest:
- whether a misleading and deceptive conduct claim under the ACL arising from a cyber fraud incident undermined the court’s jurisdiction in an application for judgment under s17(2) of the Act; and
- whether service using a cloud-based document exchange platform constitutes service under the Act.
Burchell J rejected the respondent’s defences. As to the first point, Her Honour held that the misleading and deceptive conduct allegation based on a cyber fraud incident arose under the contract and was not a jurisdictional issue. It, therefore, had to be disregarded under s17(4)(b)(ii) of the Act. On the second point, despite the contract not explicitly providing for service via a platform such as MYOB, Her Honour found the document was validly served at the time of receipt by Hutchinson (i.e. when it accessed the file and downloaded the invoice).
What happened?
In July 2020, Hutchinson fell victim to a ‘phishing’ scam after receiving an email from a third party claiming to be YVC which requested Hutchinson to change YVC’s banking account details. As a result, $431,454.57 that was due to YVC was paid by Hutchinson to a fraudster. Hutchinson blamed the fraud on a compromise in YVC’s email system.
On 13 October 2020, YVC purported to serve a payment claim for $529,751 on Hutchinson through a link in an email sent via YVC’s accounting software (MYOB) from which Hutchinson downloaded Payment Claim 4 (PC4).
On 19 October 2020, Hutchinson served a payment schedule under the Act proposing to pay $529,033. On 21 October 2020, Hutchinson issued a “Request for Credit” which purported to apply a deduction of $215,727 to the scheduled amount, representing 50% of the $431,454.57 paid to the fraudster. Accordingly, Hutchinson withheld $215,727 from its payment of $529,033 to YVC.
YVC applied for judgment in the amount of $215,727 under s17(2) of the Act on the basis that Hutchinson had failed to pay the full amount scheduled in its 19 October payment schedule.
In opposition to the application, Hutchinson relied on four grounds:
- PC4 was invalid;
- Invalid service of PC4 via YVC’s accounting software;
- The scheduled amount in the 19 October payment schedule was reduced by $215,727 when Hutchinson issued an amending payment schedule on 21 October in the form of a “Request for Credit”.
- It had possible defences of misleading and deceptive conduct and equitable set off.
Burchell J rejected grounds (a) to (d) and held that YCV was entitled to payment of $215,727 under s17(2) of the Act.
For the purposes of this note, grounds (b) and (d) will be discussed.
Is service via a document exchange platform valid service?
Many projects use such platforms. Examples include Aconex and numerous others. Not all are used for making or responding to payment claims.
Section 50 of the SOP Act sets out the methods by which a payment claim may be served. It includes any ‘manner specified in the relevant construction contract’.
Hutchinson submitted that the payment claim had not been served on YVC in accordance with the Act because the contract did not expressly provide for a service via a document exchange platform or equivalent.
Burchell J considered the following authorities:
- Metacorp Australia Pty Ltd v Andeco Construction Group Pty Ltd & Ors2 in which Vickery J held that s 50 of the Act is facultative, not mandatory. Other statutory methods of service were permissible’;3 and
- CS Infrastructure Support Pty Ltd v Jones Lang Lasalle (NSW) Pty Ltd,4 in which Stynes J held that the electronic platform in issue (Corrigo) was an ‘electronic address’ for the purposes of s13A of the Electronic Transactions (Victoria) Act 2000 (ETA). However, as it was not a ‘designated address’, that is an agreed address, s13A(1)(b) of the ETA will deem the time of receipt of a payment claim to be when the defendant became aware it.
Her Honour, held that the link provided in the email sent via MYOB was sufficient service and that PC4 was received by Hutchinson when it became aware of it on 13 October 2020.
Misleading and deceptive conduct and equitable set off
Hutchinson argued that the fraud occurred due to YVC’s failure to maintain a robust email system. It contended that this failure gave rise to the following defences:
- A claim against YVC for misleading or deceptive conduct under the Australian Consumer Law (ACL) due to YVC’s representation (through its conduct in regularly submitting claims for payment via email) that its email security protocols were sufficiently secure; and
- A defence of equitable set off arising from the loss incurred by Hutchinson in paying the third party the sum of $431,454.57 due to YVC breaching a duty to Hutchinson to ensure that its email protocols were sufficiently robust so as to withstand infiltration.
Under s17(4)(b)(ii) of the Act, defences “in relation to matters arising under the construction contract” cannot be raised in opposition to an application for judgment under s17(2). The issue was whether the above defences were prohibited under s17(4)(b)(ii).
Burchell J observed that the cases involving misleading and deceptive conduct applied only to a narrow class of defences. These concerned claims in relation to the manner in which the plaintiffs perform their obligations under the Act, such as how they have served payment claims on the defendants, not in relation to performance or failure to perform under the construction contract.5 In this way, those permissible ACL defences do not arise ‘under the construction contract’ and thus are not precluded by s17(4)(b)(ii) of the Act.
However, Her Honour held that, any issues regarding YVC’s obligations concerning security features for the use of email as a method of service of payment claims could only arise under the contract. In addition, this was not a case of misleading and deceptive conduct in relation to the manner in which YVC has performed its obligations under the Act.
Furthermore, Her Honour considered that it would be inconsistent with the ‘pay now, argue later’ purpose of the Act, to permit Hutchinson to raise these issues in opposition to an application under s17(2) of the Act. Hutchinson could, and would have to, litigate these claims in separate proceedings.
Takeaways
- Service of payment claims via document exchange platforms may be permissible under the ETA. However, it is always preferable to specify this (or any other method of electronic service) in the contract. If this is not agreed, you run the risk of a court or an adjudicator finding that the date of service is the date on which the recipient becomes aware of the document by clicking on the relevant link. This may be after any relevant time bars under the Act or the contract.
- Include all defences in your payment schedule. Hutchinson could have avoided judgment for the $215,727 deducted in respect of the fraudulent payment had it made the deduction in its first payment schedule dated 19 October 2020.
- Even fraud by a third party is no defence to an application for judgment under s17(2). The same is likely to apply in an application for judgment under s16(2) (which is discussed here in the Herbert & Mason decision).
This article was written by Paul Graham, Partner, Brian Rom, Special Counsel and Jane Ku, Solicitor.
1[2021] VCC 1019.
2[2010] VSC 199.
3Ibid 162. at [162].
4[2020] VSC 739 [119] to [148].
5[73]-[76], citing Aalborg Csp AIS v Otto way Engineering Pty Ltd [2017] SASCFC 158; Bitannia Pty Ltd & Anor v Parkline (2006) 67 NSWLR 9; and Neumann Contractors Ply Ltd v Traspunt No 5 Pty Ltd [2010] QCA 119 at [47]-[48].
