The Federal Court, per Halley J, set aside a statutory demand in CBS Commercial Canberra Pty Ltd v Axis Commercial (ACT) Pty Ltd, in the matter of CBS Commercial Canberra Pty Ltd [2022] FCA 544 in finding that an offsetting claim constitutes a genuine dispute. It is a very good decision setting out the complications of offsetting claims arising from building contracts relied upon in setting aside a statutory demand which is based on a certificate and judgment obtained under the Security of Payments Act.

FACTS

CBS engaged Axis as a sub-contractor to undertake work at a building site located in Gungahlin in the Australian Capital Territory [12].

The chronological events are:

• Axis was scheduled to commence set-out works on the Site in or about September 2019.
• the formal commencement date for the set-out works was delayed to mid November 2019 due to alleged defects in the structural designs for the Site [13].
• between 21 November 2019 and 20 November 2020, Axis submitted 13 progress claims to CBS.
• CBS provided 13 payment schedules to Axis in response to the progress claims [14].
• On 19 December 2019, CBS and Axis entered into an AS4303-1995 subcontract for the construction of internal partitions and the installation of external cladding at the Site (Subcontract) [15]. Under the  Subcontract:
  • the “Date of Practical Completion” was 1 July 2020.
  • the rate of liquidated damages was $5,000.00 per day.
  • CBS was entitled to liquidated damages at that rate if Axis failed to achieve practical completion by the Date of Practical Completion [16].
• Axis did not reach practical completion by 1 July 2020, did not ask CBS for a certificate of practical completion and no certificate of practical completion was issued to Axis [17].
•  on 3 November 2020, CBS sought liquidated damages of $550,000.00 for the period 2 July 2020 to 20 October 2020 [18].
• on 4 January 2021 Axis submitted a progress claim 14 of $1,192,580.83 (excluding GST),which included amounts from previously unpaid progress claims[19].
• on 13 January 2021, CBS requested that Axis provide it with the keys for the apartment units constructed on the Site in order to achieve practical completion.  Axis declined because of unpaid progress claims [20].
• on 15 January 2021, CBS provided Axis with a payment schedule in response to the progress Claim whichincluded 27 separate deductions, described as backcharges for works performed by third party subcontractors amounting to $264,287.75 (Payment Schedule) [21].
• On 20 January 2021, Axis served a show cause notice on CBS pursuant to cl 44 of the Subcontract alleging a number of breaches by CBS, including claiming back charges, making claims for unliquidated damages for which it had no entitlement and deducting liquidated damages and claiming delays when CBS’s programmes were deficient and there was no critical path provided under the Subcontract (Show Cause Notice) [22].
• on 25 January 2021, CBS responded to the Show Cause Notice [23].
• on 1 February 2021, Axis lodged an adjudication application under theBuilding and Construction (Security of Payment) Act 2009 (ACT) (SOPA) [24].
• on 16 February 2021, CBS lodged an adjudication response under the SOPA [25].
• on 8 March 2021, the Adjudicator made the Determination under the SOPA in an amount of $783,474.63 (Adjudicated Amount).
• on 22 March 2021, the authorised nominating authority, Adjudicate Today Pty Limited, issued an adjudication certificate in an amount of $845,674.79, comprising the Adjudicated Amount, interest of $8,500.16 and total fees of $53,700.00 paid by Axis on behalf of CBS (Adjudication Certificate) [28].
• on 20 April 2021, CBS served a notice of dispute pursuant to cl 47.1 of the Subcontract on Axis in which it, inter alia, claimed an entitlement to liquidated damages for delay, backcharges and/or damages for defective works, and included further offsetting claims that had not been advanced before the Adjudicator comprising:

(a) a claim for liquidated damages for delay between 20 October 2020 and 23 December 2020 at $5,000.00 per day, in aggregate an amount of $325,000.00 (Subsequent Liquidated Damages Claim);

(b) a further 12 backcharge claims, numbered BC27 to BC38 for various matters including for a fire audit, replacing unit entry door and common area cylinders, rectification of fire doors and finishing incomplete insulation work, in an aggregate amount of $81,220.79 (Subsequent Backcharges); and

(c) a further negative variation in an amount of $55,529.55 for plywood cladding on the basis that Axis had only performed a portion of the supply and installation of plywood cladding in the lobby at the Site and refused to complete the remainder (Subsequent Negative Variation) [29].

• on 16 April 2021, the Adjudication Certificate was filed in the Supreme Court of the Australian Capital Territory and registered as an enforceable order on 20 April 2021 (Judgment Debt) [30].
• on 28 April 2021, Axis served the Statutory Demand on CBS. The debt alleged to be due and owing in the Statutory Demand was the Judgment Debt of $845,674.79 [31]. The Statutory Demand was based on an adjudication determination (Determination) pursuant to the SOPA.
• on 19 May 2021, CBS filed the originating process in this proceeding seeking to set aside the Statutory Demand [32[.

DECISION

CBS contended that it had offsetting claims under s 459H(1)(b) of the Corporations Act 2001 (Cth) (Corporations Act) that:

• arose in the period up to 23 December 2020
• in an aggregate amount of $1,454,603.00 (Offsetting Claims)
•  it can rely upon to establish a genuine counterclaim falling within s 459H(5) [3].  

The court specified the principal issues for determination as:

(a) whether an offsetting claim that has been rejected in an adjudication determination under the SOPA can be relied upon as an offsetting claim for the purposes of setting aside a statutory demand pursuant to s 459H of the Corporations Act;

(b) whether the Offsetting Claims are in truth claims that can properly be characterised as offsetting claims; and

(c) whether the Offsetting Claims are genuine [4].

“Offsetting claim” is defined at s 495H(5) as:

offsetting claim means a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates) [33].

The test for a genuine offsetting claim is whether the Court is satisfied that there is a serious question to be tried or an “issue deserving of a hearing” as to whether a company has such a claim against the creditor [34].

The court made the oft stated comment that an offsetting claim must be bona fide and based on truly existing facts and not a claim that is spurious [35] and noted that:

• in Macleay Nominees Pty Ltd v Belle Property East [2001] NSWSC 743 at [18] the court sait that “Good faith” means arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful and in a claim for unliquidated damages for economic loss that means some evidence to show the basis upon which the loss is said to arise and how that loss is calculated [36].
•  In Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601, the court stated that the essential task is relatively simple — to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it) [37].
• the court must find that a genuine dispute exists even where any case apparently available to be advanced to the contrary seems stronger [38]
• only a claim that is capable of being quantified as an amount of money can qualify as an “offsetting claim” [39]

Under SOPA and other equivalent State Acts (together Security of Payment legislation):

• a person who carries out work under a construction contract is provided with a statutory entitlement to progress payments as and from each “reference date” under the contract.
• there is a scheme ifor the resolution of disputes, principally through extra-judicial adjudication, commencing with the service of a payment claim and concluding with an adjudication determination by an independent adjudicator [40].

The statutory object of the SOPA, at s 6, is:

(1) The object of this Act is to ensure that a person is entitled to receive, and is able to recover, progress payments if the person—

(a) undertakes to carry out construction work under certain construction contracts; or

(b) undertakes to supply related goods and services under certain construction contracts [41].

The court noted that Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91 the West Australian Court of Appeal:

• held that  adjudicated amounts under the SOPA wcould not give rise to a genuine dispute as to the existence or amount of the resultant judgment debt [48].
• stated that  the recipient of a statutory notice may successfully apply to set aside a statutory demand based on an adjudicator’s determination or a consequent judgment if it has offsetting claims arising from transactions separate from those that give rise to a judgment debt based upon an adjudication under the Act [50].

There is a distinction between a debt that was due and payable by reason of the adjudicator’s determination and subsequent judgment and an offsetting claim “arising from transactions separate from those that gave rise to a judgment debt based upon an adjudication under the Act” [51].  What is less clear is the scope of what transactions the Court of Appeal [52].

The court cited Re Douglas Aerospace Pty Ltd (2015) 294 FLR 137; [2015] NSWSC 167,which held, based on a review of authorities, that:

• a “true” offsetting claim may be relied on to set aside a statutory demand based  on an adjudication certificate because because the effect of s 459H(1)(b) is that any claim the company has against the creditor falls within the definition of offsetting claim[54].

• The debt may be beyond dispute but a demand for it may be met by an offsetting claim. An offsetting claim  need not have any connection with the debt such as a genuine cross-claim for damages for negligence or breach of contract or restitution
• while a demand for an amount adjudicated under SOPA legislation is not amenable to a “genuine dispute” under s 459H(1)(a), it remains vulnerable to a genuine “offsetting claim” under s 459H(1)(b) [54].

The court also noted that in Re J Group Constructions Pty Ltd (2015) 303 FLR 139; [2015] NSWSC 1607 offsetting claims rejected by an adjudicator during a determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) could be relied upon as offsetting claims in an application to set aside a statutory demand pursuant to s 459H [56].

CBS submitted that:

• as it relied on “true” offsetting claims and  asserting that the adjudicated sums are not payable under the Subcontract it can rely on the Original Liquidated Damages Claim, the Rejected Backcharges and the Excluded Backcharges (together Original Offsetting Claims) [57];
• the Subsequent Liquidated Damages Claim, Subsequent Backcharges and Subsequent Negative Variation (together Subsequent Offsetting Claims) are claims that were not advanced before the Adjudicator and are not precluded from being raised as genuine offsetting claims as well as a “true” offsetting claim [58].
• the Original Offsetting Claims are “genuine” offsetting claims by reference to the reasoning of the Adjudicator and the findings that he made in the Determination [59].
• the Original Liquidated Damages Claim was a complex matter involving extensive submissions, expert evidence and disputed questions of fact and law. The Subsequent Liquidated Damages Claim is in the same position [60].
• the Adjudicator did not address the Excluded Backcharges because the basis for the payment of those back charges had not been specified in any payment schedules. It characterised this as a kind of pleading point that arose under the SOPA and demonstrated that, in truth, these claims had not been determined by the Adjudicator [61].

Axis submitted that:

• the rejection of the Original Offsetting Claims by the Adjudicator means that they can no longer be genuinely in dispute and therefore CBS is precluded from now relying on them for the purpose of establishing a genuine offsetting claim for the purposes of s 459H(5) of the Corporations Act [62].
• submitted that J Group was plainly wrong and should not be followed. arguing that that, logically, a matter which was taken into account in determining the quantum of the debt should be equally incapable of doing so [63].
• CBS is “completely denuding” or “neutralis[ing]” the objects of the SOPA to advance a cross claim, relying upon matters that have been previously been determined adversely against it by the Adjudicator. It submits that it served the Statutory Demand by reason of the failure by CBS to make payment of the statutory debt created by operation of the SOPA. It submits that in the creation of that statutory debt, the Adjudicator considered the arguments advanced by the plaintiff in this application and rejected them [64].

The court stated that:

• while there is tension between the respective statutory purposes of the Security of Payment legislation and the statutory demand procedure in Division 3 of Pt 5.4 of the Corporations Act J Group was not in error [78].
• enforcement of payment provisions in the SOPA are directed at payment of adjudicated amounts through the provision of an adjudication certificate and the filing of that certificate as a judgment for a debt.
• offsetting claims might reduce by way of set off the adjudication amount but the SOPA does not prohibit reliance of claims that are in truth offsetting claims rather than disputes as to the existence of the underlying progress claims the subject of the adjudicated amount [79].
• there is a material distinction between policy considerations concerning the finality of a statutory debt, in particular tax debts and judgment debts based upon an adjudication of disputed progress claims under Security of Payment legislation and offsetting claims relied upon as a set off before an adjudicator [80].
• it did not accept that permitting an offsetting claim that has been rejected by an adjudicator is antithetical to the policy of the Security of Payment legislation [81].
• to the extent that the whole or any part of an offsetting claim had been “taken into account” by an adjudicator because it had been set off against amounts determined to be owing under progress claims, it reduced the adjudicated amount and could not logically also be relied upon as an offsetting claim for the purposes of s 459H [82].
• any alleged indebtedness owing on any part of an offsetting claim that has been set off against amounts conclusively to be found by an adjudicator to be owing on progress claims in determining an adjudication is extinguished, being ncorporated in the adjudicated amount [82].

• it is not apparent how  the Subsequent Backcharges and the Subsequent Negative Variation, neither of which were considered by the Adjudicator, could not also be relied upon as offsetting claims to set aside the Statutory Demand.

The court found that the Original Liquidated Damages claims are “true” offsetting claims because:

• they are claims for delay damages which exist independently of the progress claim and the variation claims the subject of the Determination [83].
• they turn on the resolution of factual disputes distinct from the matters the subject of the progress claim and variations claims, in particular the adequacy of the construction programmes that CBS provided to Axis.
• they were advanced in the adjudication not to reduce the amount of the progress claim made by Axis but rather as a set off to any amount determined by the Adjudicator with respect to the variation claims [83].

The Court also found that Subsequent Backcharges and the Subsequent Negative Variation are offsetting claims falling within s 459G(5) of the Corporations Act and can be relied upon by CBS in its application to set aside the Statutory Demand [85].

The court ordered that the Statutory Demand be set aside [91].

ISSUE

The decision highlights the pitfalls in parties assuming that certificates issued under SOPA are not capable of offsetting claims.  As the court noted there is a tension between the intent and operation of  SOPA and bases to set aside statutory demands.  In applying to set aside it is important to set out in detail the basis for the offsetting claim, as CBS did.