The recent decision of the Supreme Court of Western Australia in Kellogg Brown & Root Pty Ltd v Doric Contractors Pty Ltd [2014] WASC 206 established that a party seeking to rely on a determination under the Construction Contracts Act (WA) must first seek leave to enforce the judgment before issuing a statutory demand pursuant to the Corporations Act 2001 (Cth). The decision demonstrates the interaction of the statutory demand regime and the regime for the rapid resolution of payment disputes provided by the Construction Contracts Act.

Background

Doric were engaged as the head contractor for the construction of two buildings at BHP Billiton’s Jimblebar iron ore project located in the Pilbara region of Western Australia. Doric engaged Kellogg Brown & Root (KBR) to provide engineering services in relation to the construction of the two buildings (Contract).

Construction was completed in July 2013 and KBR issued its final invoice on 24 July 2013. In October 2013, Doric issued two invoices to KBR in relation to the Contract. KBR refused to pay the invoices on the basis that they were in the nature of damages for poor performance or non-performance by KBR under the Contract, and not for goods and services provided by Doric to KBR.

In December 2013, Doric made an adjudication application under the Construction Contracts Act(CCA) in relation to KBR’s failure to pay both invoices. The adjudicator found in favour of Doric and determined that KBR were liable to pay each invoice.

On 4 February 2014, KBR made an application for judicial review. On 18 February 2014, Doric issued KBR with a statutory demand for the debt arising out of the adjudicator’s determination. KBR then made an application under section 459G of the Corporations Act to have the statutory demand set aside.

The Necessity Of Leave To Enforce The Determination Prior To Issuing A Statutory Demand

The case examined the interaction of the statutory demand regime and the security of payment regime provided by the CCA. The question the court considered was whether a determination under the CCA could be enforced through a statutory demand, without first obtaining leave to enforce that determination under section 43(2) of the CCA. The court ultimately held that a determination under the CCA may be enforced by statutory demand, but only if the party enforcing the determination has leave of the court, pursuant to section 43(2) of the CCA.

In his reasons, Acting Master Gething referred to the recent case of Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91. In Diploma, the Court of Appeal confirmed that a statutory demand was a method of enforcing a determination; however, leave to enforce had already been obtained prior to the issue of the statutory demand. Acting Master Gething stated that the decision of the Court of Appeal qualified his conclusion that you must first have leave to enforce a determination before it becomes a debt that is presently due and payable. It is only when a determination becomes a debt presently due and payable that the determination can then form the basis for a statutory demand.

The Relevance Of Judicial Review Proceedings On The Grant Of Leave To Enforce

In KBR v Doric, there were separate judicial review proceedings on foot that were commenced by KBR prior to Doric issuing the statutory demand. The court considered that the availability of judicial oversight of an adjudicator’s determination lent positive support to its conclusion that leave to enforce a determination was required before a statutory demand based on the determination could be issued. This is because when considering if leave to enforce should be granted, the court may take into account whether the adjudicator’s determination would be successfully set aside during judicial review.

If Doric had applied for leave to enforce, the court would have taken into account KBR’s application for judicial review. Even if KBR had not made an application for judicial review, KBR could have disputed the adjudicator’s jurisdiction and the validity of the determination at this stage. As a result, Doric may have been refused leave to enforce, and would be precluded from enforcing the determination either by statutory demand or other means.

Abusing The Statutory Demand Process Will Result In The Statutory Demand Being Set Aside

The Corporations Act enables the court to set aside a statutory demand if there is a genuine dispute or offsetting claim in relation to the debt or where the statutory demand is defective or there is some other reason to set aside the demand.

The court held that the statutory demand was valid on its face and could not be set aside by reason that it was defective. As a result, the court turned its mind to whether there would be some other reason to set aside the statutory demand. This is a general discretionary power afforded to the court and is usually exercised in the context where it would be unconscionable, an abuse of process or not in the interests of justice to not set aside the statutory demand.

The court opined that it would not be in the interests of justice to allow Doric to issue a statutory demand in breach of section 43(2) of the CCA. It held that Doric’s failure to comply with section 43(2) of the CCA and issuing of a statutory demand on a solvent KBR merely for the purpose of recovering an unpaid disputed debt was an abuse of process. On the basis of this abuse of the statutory demand process, the demand was set aside.

The Take Home Message

It is important for parties wishing to obtain the benefit of a determination under the CCA to first obtain leave of the court pursuant to section 43(2) of the CCA to enforce the determination. A determination alone does not create an immediately enforceable debt. Merely issuing a statutory demand will not be sufficient to obtain payment of the determination and a party that does so is likely to have their demand set aside as an abuse of the statutory demand process under the Corporations Act.

For further information, please contact:

Beth Cubitt, Partner, Clyde & Co

[email protected] 

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