Can judgment debts under Security of Payment legislation be enforced?

Birdon Pty Ltd v Houben Marine Pty Ltd [2011] FCAFC 126

The NSW Security of Payment Act provides that an adjudication certificate may be filed in court as a judgment for a debt and may be enforced accordingly.  A party argued that this enforcement regime, which does not allow judicial scrutiny of the debt, conflicts with federal law and is unlawful.  By a 2-1 majority, the Full Court of the Federal Court found no conflict.

In Birdon Pty Ltd v Houben Marine Pty Ltd [2011] FCAFC 126, the Full Court of the Federal Court was asked to determine, among other things, the enforceability of section 25 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the “NSW SOPA”).  Section 25(1) provides:

“An adjudication certificate may be filed as a judgment for a debt in any court of competent jurisdiction and is enforceable accordingly.”

Section 25(4) of the NSW SOPA provides, among other things, that if the respondent commences proceedings to have the judgment set aside, the respondent in those proceedings, is not entitled to bring any cross claim, or raise any defence arising under the construction contract or challenge the adjudicator’s determination.  In short, once an adjudication determination has been made it may be enforced by the claimant as if it was an order of the Court, but without the Court having the jurisdiction to review the determination.

The case is relevant in Victoria because the Building and Construction Industry Security of Payment Act 2002 (Vic) has similar provisions.

The facts

The first defendant claimed that a contract for the hire of a dredge was a “construction contract” within the meaning of the NSW SOPA and sought to invoke the adjudication procedures under the Act in support of a claim for a $2M progress payment.   The plaintiff, on the other hand, alleged among other things, that the first defendant had engaged in misleading or deceptive conduct in relation to the hire of the dredge and the making of payment claims and sought to enjoin the adjudication of the progress claim.

Adjudication of progress payments under the NSW and Victorian Acts

The adjudication procedure under the NSW SOPA is similar to that in Victoria.  It involves an interim determination by an adjudicator of claims for progress payments in connection with construction contracts.  The adjudicator’s determination may be enforced as a judgment debt.  While a respondent to an unfavourable adjudication may commence Court proceedings to finally determine the parties’ rights, if the payee goes into administration in the meantime, then any Court Order for restitution may be meaningless.

Inconsistency between state and federal law

The respondent (the plaintiff in the court proceeding) claimed that the claimant (being the first defendant in the Court proceeding) had breached provisions of the Admiralty Act 1988 (Cth) and the Australian Consumer Law, thus invoking the federal jurisdiction of the Court.  The plaintiff argued that the provisions of the NSW SOPA relating to the enforcement of an adjudication determination were inconsistent with the federal jurisdiction invoked by the plaintiff, because the NSW SOPA would prevent the plaintiff agitating its federal law claims in defence of any judgment debt enforceable pursuant to the NSW SOPA.  Further, the plaintiff also argued that the enforcement regime for adjudications was inconsistent with the institutional integrity of Courts exercising the judicial power of the Commonwealth.

Majority finds no inconsistency with federal jurisdiction

Keane CJ and Buchanan J, in separate judgments, found that there was no inconsistency with federal law and that, accordingly, the impugned provisions of the NSW SOPA were valid. In particular, Keane CJ highlighted the interim nature of the adjudication regime which indicated that the alleged inconsistency did not exist.  His Honour stated at [33]:

“…the Security of Payment Act is not concerned to give effect to the rights of the parties under the construction agreement.  As is apparent from the terms of s 32(2) [which states, in effect, that the parties’ rights are preserved], it expressly leaves the determination of those rights to the courts.”

Justice Buchanan came to a similar view.

Rares J in the minority finds inconsistency between State and Federal Law

Justice Rares, on the other hand, held that the enforcement provisions of the NSW SOPA were inconsistent with Ch III of the Commonwealth Constitution because they interfered with the integrity of the judicial process, and because they expressly prohibit a debtor bringing any cross-claim in proceedings in connection with the enforcement of an adjudication and thus purport to exclude a court in such proceedings from exercising federal judicial power.  While the second defendant argued that the effect of the NSW SOPA was to create a separate, stand alone right to payment that was subject to later adjustment by the Courts, Rares J did not agree and stated at [99] that:

“a State law cannot limit or withdraw a part of a controversy from the scope of the application of a valid federal law or the exercise of federal jurisdiction.”

Rares J held, among other things, that the section 25 of the NSW SOPA was invalid.

Comment

While the ability of a party to enforce an adjudication determination under the Security of Payment legislation in Victoria and NSW remains intact, serious questions have been raised about the constitutional validity of the enforcement regime where conflict may arise with Federal legislation.  These questions may ultimately end up before the High Court.

Adam Rollnik – CommBar profile