Re N2SH Pty Ltd
[2023] VSC 188
•14 April 2023
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2022 02866
IN THE MATTER of N2SH PTY LTD (ACN 606 603 196)
BETWEEN:
| N2SH PTY LTD t/a N2SH DESIGN STUDIO (ACN 606 603 196) | Plaintiff |
| v | |
| ADP CONSULTING PTY LTD (ACN 139 719 529) | Defendant |
---
JUDGE: | Barrett AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 28 November 2022 |
DATE OF JUDGMENT: | 14 April 2023 |
CASE MAY BE CITED AS: | Re N2SH Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2023] VSC 188 |
---
CORPORATIONS – Application to set aside a statutory demand – Corporations Act 2001 (Cth) ss 459G, 459H, 459J – Whether the plaintiff has offsetting claims – Whether there is a genuine dispute as to the existence or amount of the debt – Whether the statutory demand should be set aside for some other reason – Plaintiff has offsetting claims – Genuine disputes in relation to the existence of debts – Unnecessary to determine whether statutory demand should be set aside for some other reason – Statutory demand set aside.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr C Hender | Rotman & Morris |
| For the Defendant | Mr T Bevan | Kennedy Guy |
TABLE OF CONTENTS
Background......................................................................................................................................... 1
The statutory demand....................................................................................................................... 3
Offsetting claims................................................................................................................................ 4
Is there an offsetting claim in relation to the Yarrawonga Library works?.......................... 5
Is there an offsetting claim in relation to the Yarrawonga Stadium works?...................... 11
Is there an offsetting claim in relation to the Warragul Stadium works?........................... 13
Is there an offsetting claim in relation to the Pembroke Stadium works?.......................... 21
Is there an offsetting claim in relation to the Darley Park works?....................................... 22
Is there an offsetting claim regarding Perth Early Learning Centre works?...................... 24
Is there an offsetting claim in relation to the Chiltern Community Hub works?.............. 24
Genuine dispute............................................................................................................................... 26
Is there a genuine dispute about invoice ADP59337?............................................................ 26
Is there a genuine dispute about invoices ADP57807 and ADP59053?.............................. 26
Some other reason............................................................................................................................ 26
Conclusion......................................................................................................................................... 27
HIS HONOUR:
By its originating process filed on 29 July 2022, the plaintiff seeks to set aside the statutory demand dated 7 July 2022 and served on it by the defendant on 8 July 2022 pursuant to s 459G of the Corporations Act 2001 (Cth) (‘the Act’) on the following bases:
(a) there is some other reason to set aside the statutory demand pursuant to s 459J of the Act and in particular: the statutory demand is defective because it fails to properly particularise or explain the debt; the affidavit does not verify the debt; and the amount demanded is not ‘due and payable’;
(b) there is a genuine dispute (for the purposes of s 459H(1)(a) of the Act) as to the existence and/or amount of the debt; and/or
(c) the plaintiff has offsetting claims under s 459H(1)(b) of the Act.
The plaintiff relies on:
(a) affidavits of Mr Hughan affirmed on 29 July 2022, 10 October 2022 and 24 November 2022; and
(b) written submissions filed on 14 October 2022 and 24 November 2022.
The defendant relies on:
(a) the affidavit of Mr Marthinus Noyce affirmed on 16 September 2022;
(b) the affidavit of Tammy Vu affirmed on 26 October 2022; and
(c) written submissions filed on 26 October 2022.
Background
The plaintiff provides architecture, interior design, strategic and specialist planning and designing services for community oriented and social infrastructure projects. Its main clients are government bodies.
The defendant is a multi-services engineering consultancy. Since about early 2019, the defendant has engaged the plaintiff as a subcontractor in relation to several different projects. No written contract between the plaintiff and defendant has been produced and Mr Hughan says that he is not aware of any formal signed contract. Mr Hughan says that the defendant has provided ‘various proposals and short form agreements’ in relation to the services it was to provide, but none were agreed to because the plaintiff ‘was restricted in terms of what it could agree to with subcontractors, under the terms of its agreement with local Councils.’ Mr Hughan says Mr Noyce ‘accepted this in [their] conversations’.
Mr Hughan describes the ‘usual process’ by which the plaintiff engaged the defendant as follows:
[The plaintiff] would invite [the defendant] to access a dedicated file repository, which link provided [the defendant] with access to all tender documentation, including the terms of [the plaintiff’s] contract with the relevant Government body, and the scope of works covered by the relevant contract. [The defendant] would then bid on aspects of [the plaintiff’s] retainer for a fixed fee by providing a fixed fee proposal to [the plaintiff].
As for the actual terms of the engagement, Mr Hughan describes them as follows:
I (and by extension N2SH) engaged ADP on the basis that it would be paid when N2SH was paid by the local government. Furthermore, N2SH worked with ADP on this basis over a number of years, and over a number of projects including Pembroke Park Stadium, Yarrawonga Stadium, Yarrawonga Library, Wodonga Aquatic and Leisure Centre, GOTafe Wangaratta, Perth Early Learning Centre, and Darley Park Community and Sports Pavilion. Indeed, ADP acknowledge the back-to-back nature of our agreement in its fee proposal for the Darley Park project …
The defendant’s Darley Park proposal lists proposed fees for various phases of the work, and options, and hourly rates, and then contains the following:
Terms of Engagement
The offer is made to Moorabool Shire Council C/- N2SH Design Studio whom we understand will be our client for the project.
Our offer is based on the terms of this proposal and an agreed back-to-back version of the Moorabool Shire Consultancy Agreement.
By his affidavit in opposition affirmed on 16 September 2022, Mr Noyce, technical director of the defendant, describes the process by which the defendant came to work ‘with the plaintiff … on multiple projects’ as follows:
5. The process for how N2SH engaged ADP was that N2SH would invite ADP to access a dedicated file repository which folders provided ADP access to all tender documentation, including N2SH’s contract with the relevant Council body and the scope of works covered by that relevant contract. ADP would then bid on aspects of N2SH’s retainer by submitting a fixed fee proposal to N2SH that sets out the proposed scope of work, associated fees and terms and conditions. ADP issued fee proposals for each of the Projects.
6.ADP’s fee proposal contains terms and conditions inter alia that invoices would be rendered monthly and are payable within 30 days.
Mr Noyce accepts that the Darley Park proposal was put on a back-to-back basis, but distinguishes that proposal from all other relevant proposals in which there were no mention of back-to-back payments by explaining that the proposal was put on the basis that invoices would be rendered monthly and be payable within 30 days. Mr Hughan says that the proposals provided by the defendant were just that, and that in practice the arrangements between the plaintiff and defendant always proceeded on a back-to-back basis. Accordingly there is a dispute as to the terms of the agreement between the parties.
Mr Hughan says the working relationship went well between March 2020 and July 2021, but thereafter deteriorated culminating in the defendant serving a statutory demand on the plaintiff for the amount of $76,994.66 said to be owing pursuant to various invoices.
The statutory demand
The description of the debt in the statutory demand is:
[N2SH PTY LTD] owes ADP CONSULTING PROPRIETARY LIMITED ACN 139 719 529 of 55 Collins Street, Melbourne 3000 in the State of Victoria the amount of $76,994.66 being the total of the amounts of the debts described in the Schedule.
The schedule contains a table headed ‘Description of Debt …’ and thereafter sets out four columns which are headed ‘Invoice No’, ‘Date’, ‘Due Date’ and ‘Amount’. There are no words of description of the said debts in the table. The statutory demand also states:
2. Attached is the affidavit of DESMOND CROKE, Financial Controller dated 7 July 2022 verifying that the amount is due and payable by the Company.
The affidavit of Desmond Croke, relevantly contains the following:
1. I am a Financial Controller of ADP CONSULTING PTY LTD (“the Creditor”) and am authorised to swear this affidavit on its behalf.
2. I have had regard to the books and records of the Creditor in respect of the debts and interest owed by N2SH Pty Ltd (“the Debtor”) relating to the total of the amounts detailed in the Schedule to the accompanying statutory demand relating to services provided by the Creditor to the Debtor between August 2021 and May 2022 in respect of which the following invoices have been issued …
Thereafter is the same table as appears in the schedule to the statutory demand. The affidavit goes on to state:
3. I believe the amount of $76,994.66 being the total of the amounts specified in the accompanying demand is due and payable by the Debtor to the Creditor.
There does not appear to be any dispute that the defendant issued various invoices to the plaintiff. However, the plaintiff says there is a genuine dispute about the amounts claimed, and also describes in some detail a number of alleged off-setting claims against the defendant arising from defective workmanship, delays and others issues in ADP’s work on several different projects. The plaintiff also submits that the statutory demand should be set aside for some other reason pursuant to s 459J of the Act because the debt is not described as required. The defendant maintains that the statutory demand should not be set aside. I will deal first with the offsetting claims.
Offsetting claims
The plaintiff submits that it has offsetting claims in relation to a number of projects including Yarrawonga Library, Yarrawonga Stadium, Warragul Stadium, Pembroke Stadium, Darley Park Pavilion, Perth Early Learning Centre and Chiltern Community Hub. It also claims a general offset for work undertaken by the plaintiff on behalf of the defendant.
To succeed in an application under s 459H(1)(b) of the Act, the applicant is required to establish that there is ‘a plausible contention requiring investigation.’[1] An applicant is not required to advance a fully evidenced claim, and it is ‘not necessary or appropriate for a court to engage in an in-depth examination or determination of the merits of the alleged dispute.’[2] For reasons set out below, I am satisfied that the plaintiff has established that there are plausible contentions requiring investigation in respect of the offsetting claims, and that the amount of the offsetting claims exceed the value of the statutory demand.
[1]Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in Liq) [2015] VSCA 330 [48] (Kyrou, Ferguson and Kaye JJA) (‘Malec’), quoting Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) 85 NSWLR 601, 613 [55] 9 (Beazley P, Meagher and Gleeson JJA).
[2]Ibid.
Is there an offsetting claim in relation to the Yarrawonga Library works?
There is no dispute that the Moira Shire Council engaged the plaintiff to provide detailed design documentation services for the construction of the Yarrawonga Library, and the plaintiff subsequently engaged the defendant to provide engineering services for that project. There is a dispute as to the nature of the services to be provided by the defendant and the circumstances in which it would be entitled to be paid.
The plaintiff submits that the defendant was responsible for all aspects of the preparation and provision of detailed design documentation including construction drawings, fire protection, and electrical and hydraulic services. To that end, the defendant was required to liaise with relevant authorities, including North East Water and Powercor, and produce appropriate compliant designs for construction. The contract between the parties would be on a back-to-back basis; that is, it would mirror the plaintiff’s contract with the Moira Shire Council, and the defendant would be paid when the Council paid the plaintiff for the work that was done.
The plaintiff submits that the defendant failed to liaise with the relevant authorities, and did not prepare the documentation in a timely fashion which resulted in delays and a significant increase in construction costs. The plaintiff says that these increased costs were directly caused by the defendant’s delays, and that the Moira Shire Council has passed on those additional costs to the plaintiff. There is a degree of obscurity about the liaising that was to occur. It appears from correspondence that one issue involved North East Water and the location of a sewer and manhole and water pressure considerations, and another issue involved overhead power lines and whether they were on the site or external to the site and how they might affect design. There is correspondence in which the plaintiff asserts that the defendant was responsible for issues around the power lines, however the defendant asserts such matters were excluded from their contractual responsibility as the powerlines were external to the site. It is unclear on the evidence whether the powerlines are within the site or not.
In his first affidavit, Mr Hughan refers to a discussion on about 31 March 2022 with the Council’s building surveyors in which the surveyors said that the defendant’s fire engineering, design and calculations, and hydraulic services documentation issued in relation to the library were -noncompliant with the National Construction Code and Fire Rescue Victoria requirements, and failed to identify and accommodate a shortfall in water supply, and was accordingly rejected. Mr Hughan also says that the defendant’s documentation was provided to Tivra Engineering to be peer reviewed. Tivra provided a report by email on 8 July 2022, which identified various shortcomings in the defendant’s documentation. Mr Hughan says this caused significant delay to the issuing of a building permit for the project. Mr Hughan also says that on or about 24 February 2022, a representative of the Council said to him that the defendant had also not satisfactorily liaised with Powercor regarding the library project, causing delays of approximately 6 months, and that the defendant had failed to accommodate the existing high voltage power lines, which resulted in a redesign of the building at a cost of in excess of $42,000.
The plaintiff relies on a letter dated 9 September 2022 from Mr Hughan to the Moira Shire Council to quantify its offsetting claim. That letter refers to conversations between representatives of the Council and the plaintiff in relation to additional delay costs and their allocation. In the letter Mr Hughan identifies the escalation costs due to delays as $98,333.33 plus GST and attributes those delays to deficiencies in the services documentation prepared by the defendant as well as its failure to liaise with the relevant authorities. The amount of $98,333.33 plus GST is included in the letter in the context of a reconciliation of proposed entitlements and liabilities pursuant to the contract between the plaintiff and the Council. It appears this offer was ultimately accepted by the Council. The plaintiff therefore says that the escalation cost of $98,333.33 plus GST was caused by the defendant, and has effectively been paid by the plaintiff, and therefore quantifies its offsetting claim in relation to the Yarrawonga Library in that amount.
The defendant, on the other hand, says that the documentation it was engaged to provide was in two phases. The first phase was detailed design and the second phase was construction documentation. Mr Noyce says that the documentation provided in relation to the Yarrawonga Library was design phase documentation, not intended for use in construction, and that the defendant was waiting for a response from N2SH and the Council’s building surveyors as to any modifications that may be required. That may or may not be the case, but it is apparent from the plaintiff’s evidence and submissions that its position is that the documents that the defendant produced were not produced in accordance with its contractual responsibilities, and caused delays and escalation costs. Whether the defendant was required to produce design phase documentation or construction phase documentation, and whether the documentation actually produced complied with whatever obligation the defendant was under, are not matters that can or ought be resolved in an application of this kind.
Mr Noyce further says that the defendant was not contractually responsible for liaising with North East Water, having regard to the terms of its fee proposal, which expressly excludes all infrastructure beyond the site boundary. Again, questions of the construction of the contract and the extent of contractual responsibilities, and whether the relevant infrastructure was beyond the site boundary, are questions that are not properly dealt with in an application of this sort. To resolve them would require detailed consideration of the terms of the contractual arrangement between parties, the location of infrastructure and the design work actually prepared, and would also likely involve expert evidence as to the adequacy of the drawings.
Mr Noyce further says that the lapse of the Council’s existing application and deed with North East Water was caused by the plaintiff’s delays in engaging an accredited infrastructure designer named Tony Flammea, who the defendant had referred the plaintiff to. As far as dealings with Powercor were concerned, Mr Noyce says that it was the defendant’s understanding that the plaintiff had successfully negotiated with Powercor to mitigate the issues relating to the underground powerlines, and that therefore there was no impact on the project. In that regard, Mr Noyce relies on an email from the plaintiff to the defendant dated 1 April 2022 in which Mr Hughan states:
We have had some good news on this project … there will be no requirement for change of your documentation – the contractor and client have agreed to make this change …
Again, these questions cannot be resolved without a detailed consideration and weighing of the evidence, which is not an appropriate task in an application such as this.
The defendant relies on a number of matters in support of its submission that the plaintiff’s offsetting claims are not genuine. First, it relies on an email dated 2 June 2022 from Mr Hughan to Mr Noyce, in which he states ‘library fees will be remitted in our next pay run - apologies for the confusion and delay on this.’ Next, the defendant notes that in his first affidavit sworn on 29 July 2022, Mr Hughan said that the plaintiff would incur redocumentation fees from a company called Tivra of $9800 plus GST and $16,000 plus GST, but that in an email dated 7 July 2022, from Mr Hughan to Tivra, Mr Hughan stated that the Shire had agreed to pay TIVRA’s fee of $15,000 plus GST. The defendant notes that the plaintiff has abandoned its claim for -redocumentation fees. Finally the defendant notes that the plaintiff had initially raised a potential claim for the cost of installation of a 150,000 L fire tank at a cost of between $180,000 to $200,000 plus GST. Again, the defendant notes that allegation has been withdrawn. The defendant submits that these matters undermine the submission that there is a genuine offsetting claim.
In my opinion, these matters are not a sufficient basis upon which to conclude the off-setting claim as pressed is not genuine. The statement that library fees will be remitted in June does not mean that a claim that may crystallise some months later cannot be pursued. The fact that the previously articulated claims for redocumentation costs or fire tanks were abandoned is also not sufficient to undermine what otherwise appears to be a genuinely articulated offsetting claim. That is particularly so where the plaintiff appears to have been in an ongoing dialogue with the Council about difficulties with the design documentation and consequential delays.
In this case, the parties conducted themselves over many months under a complicated contractual structure which included unsigned proposals from the defendant and differing understandings as to the nature of each party’s rights and responsibilities. It is not unreasonable to think that the resolution of those questions may involve evidence of discussions between the contracting parties and perhaps also of their conduct over time and in relation to other projects. The extent to which it does is a matter for trial and is not appropriately resolved in this application. The observation in Anderson Formrite Pty Ltd v Rapid Metal Developments (Australia) Pty Ltd (‘Anderson’) is particularly apt:
Building disputes are notorious for their mind-numbing complexity and it must be a rare case where a challenge to a party’s claim will not be seen as giving rise to a genuine dispute.[3]
[3][2002] WASC 232, [23] (Sanderson M) (‘Anderson’), citing John Holland Construction & Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250, 254 (Young J) (‘John Holland’).
The defendant also submits that the alleged offsetting claim in relation to the Yarrawonga Library is properly characterised as a ‘potential liability claim’ and therefore is not a genuine offsetting claim for present purposes. The defendant relies upon the cases of Glenhawk Pty Ltd v Forty Second Maylux Pty Ltd (‘Glenhawk’)[4] and Hell Colour Australia Pty Ltd v Everbest Printing Company Limited (‘Hell Colour’)[5] and a passage in Assaf’s Winding Up in Insolvency, where the author states:
If a claim of a company appears to be that the company will be entitled to damages arising from an event in the future, then that claim is not one which falls within the definition of a genuine claim that the company has against the creditor.[6]
[4][2016] VSC 270, [34], [36] (Randall AsJ) (‘Glenhawk’).
[5][2010] VSC 643, [29] (Gardiner AsJ) (‘Hell Colour’).
[6]Farid Assaf, Assaf’s Winding Up in Insolvency (LexisNexis Australia, 3rd ed, 2021) 481 (citations omitted).
I do not agree that the plaintiff’s claim is properly characterised as a ‘potential liability claim’ in the sense submitted by the defendant. The plaintiff’s position is not that the Moira Shire Council may make a claim against it in the future, but rather, that the Council has already incurred escalation costs which were caused by the defendant’s delays, and which have been passed on to the plaintiff and in effect already paid by the plaintiff. In that sense, it is not a potential liability claim, but rather a liquidated claim for a specific amount. Whether that claim is a good one or not depends largely upon the construction of the contracts between the parties, and a determination as to whether the defendant has breached any terms and caused loss as a result. It is sufficient for present purposes that the plaintiff has raised contentions that call for further investigation.
The broader submission put by the defendant is that the plaintiff has not provided adequate particulars of its claim in relation to escalation costs. The defendant submits that the plaintiff has not provided any detail as to when the defendant was contractually obliged to produce design documents, when the defendant actually produced the documents, how late production was, or how any late production of documents actually caused an escalation in costs. Further, the defendant submits that the contract between the plaintiff and the Moira Shire Council included terms for the granting of variations and extensions of time, but that plaintiff did not apply for any variation or extension of time. The defendant also notes that in the 9 September 2022 letter Mr Hughan states that set-off costs are not permitted under the contract. It refers to the Council’s response to the 9 September letter in which the Council notes that each of the amounts claimed in that letter constituted variations to the contract, but that no variations had been sought by the plaintiff pursuant to the terms of the contract. The defendant submits that the Council’s response, and payment:
is not punishing N2SH for loss and damage which it says that it’s incurred because of a breach by [the defendant]. All the council says is, well, on the terms of the contract, you’re not entitled to any of these monies because you haven’t made a variation claim. Therefore, we’re not going to pay it.
I note however, that the Council’s response deals with amounts that are claimed by the plaintiff but says nothing about the escalation costs that are incorporated into the September letter explicitly – that is, escalation costs said to be owing from the plaintiff to the Council. As noted above, it appears from the content of the September letter that representatives of the plaintiff and Council had discussed escalation costs. The September letter followed on from that discussion and apparently seeks to accommodate such costs in a global net figure of $27,729.87 plus GST. In circumstances where the Council appears to have made the payment sought by the plaintiff, albeit with denial of responsibility for any variations, it is arguable that escalation costs in the sum of $98,333.33 plus GST have been taken into account between the plaintiff and the Council.
In those circumstances, I am satisfied that there is a ‘plausible contention requiring investigation’ in relation to the Yarrawonga Library works, and therefore that the plaintiff has an offsetting claim for the purposes of s 459H(1)(b).[7] As the quantum of the Yarrawonga Library claim exceeds the quantum of the statutory demand, it is a sufficient basis to set aside the statutory demand. But as many other matters were addressed by the parties, I will deal with them as well.
[7]Malec (n 1) [48].
Is there an offsetting claim in relation to the Yarrawonga Stadium works?
The plaintiff says the contractual arrangement for the Yarrawonga Stadium was similar to that for the Yarrawonga Library and that the defendant was responsible for the preparation and provision of all detailed design and construction for fire protection and hydraulic services, which had to comply with the National Construction Code and the Fire Rescue Victoria requirements. Mr Hughan says that on about 7 July 2022, a representative of the Council called him and said that the documentation that had been produced did not comply with the National Construction Code or Fire Rescue Victoria requirements and was accordingly rejected and needed to be redocumented. Mr Hughan says that Tivra provided a written quotation for $18,000 plus GST for redocumentation. Mr Hughan says that the Council will not be paying for the redocumentation and that the defendant will be liable to the plaintiff for such costs.
The defendant refers to an email dated 2 June 2022 from Mr Hughan to the defendant where he states that the stadium fees will be remitted and that there will likely be significant redocumentation required for cost savings. The defendant says that ‘Mr Hughan said something similar in his email of 1 July 2022’, and notes that the plaintiff ‘has not exhibited any documents to suggest that re-documentation was for any other purpose than that given above.’ I do not agree that the issue is as clear as the defendant has submitted. In the 1 July 2022 email referred to by the defendant, the plaintiff states in relation to the Yarrawonga Stadium that ‘the documentation is currently with [Relevant Building Surveyor] at council being reviewed.’ The contention by the plaintiff that the Council reviewed the documentation and on about 7 July 2022 found that it was noncompliant is a contention that cannot be dismissed based on what was said in the weeks prior to that. The failure to exhibit contemporaneous documents is also not a fatal omission having regard to the principles applicable to establishing an offsetting claim.[8]
[8]See Malec (n 1) [47]-[48].
It is not clear on the evidence that the documentation needed to be redone for a reason other than non-compliance with the National Construction Code and the Fire Rescue Victoria requirements. In those circumstances I am satisfied there is a plausible contention requiring investigation and therefore that the plaintiff has an offsetting claim in relation to the Yarrawonga Stadium works.
Is there an offsetting claim in relation to the Warragul Stadium works?
The plaintiff submits that there were numerous deficiencies and errors in the defendant’s design work for the Warragul Stadium. The plaintiff relies on an email dated 29 October 2021 from the Baw Baw Shire Council senior project manager who identifies what he says are numerous errors with the defendant’s drawings. The plaintiff also relies on a written quote dated 7 July 2022 from Tivra in the amount of $26,000 excluding GST for redocumentation of the Warragul Stadium design.
The defendant submits that the Court should reject any offsetting claim in relation to redocumentation because the plaintiff did not raise any issue about the works in its email to the defendant on 2 June 2022, and the Council has paid the plaintiff’s invoices in respect of these works.
In addition to redocumentation costs, the plaintiff says it is exposed to liability for escalation costs as a result of the delay caused by the defendant’s defective design. While no claim has been brought, the plaintiff relies on the decisions of Alucraft Pty Ltd (in liq) v Grocon Ltd (No 2) (‘Alucraft’),[9] C & E Critharsis Constructions Pty Ltd v Cubic Metre Pty Ltd (‘Critharsis’),[10] and Westpoint Management Ltd v Chocolate Factory Apartments Ltd; Chocolate Factory Apartments Ltd v Westpoint Finance Pty Ltd (in liq) (‘Westpoint’)[11] for the proposition that it is exposed to the risk of a claim by the Council in respect of escalation costs incurred, and that the quantum of such a claim is the scope of the escalation costs. The plaintiff estimates these costs as being in the vicinity of $200,000 to $250,000, discounted by reference to the likelihood of the claim being made, which, by analogy with the reasoning in Alucraft¸ the plaintiff puts at 50% to 80%.
[9][1996] 2 VR 386.
[10][2020] NSWCA 348.
[11][2007] NSWCA 253.
The defendant relies on correspondence between it and the Council in September 2022 to support its submissions that the defendant’s drawings were not defective, and the Council was not bringing any claim against the plaintiff for escalation costs. By email dated 9 September 2022, Mr Noyce wrote to Mr Hewitt, the manager of major projects at the Council, asking whether the Council was withholding payment to the plaintiff because of errors and inconsistencies and delays with the defendant’s documentation, and also asked whether the Council intended to bring a claim against the plaintiff as a result of any work carried out by the defendant. By email dated 9 September 2022, Mr Hewitt responded that he could not comment in relation to the withholding of any payment due to the plaintiff but did confirm that the Council was not bringing a claim against the plaintiff. By email dated 3 October 2022, Mr Hewitt wrote to Mr Hughan attaching the 9 September emails and reiterating that the Council ‘currently has no cause to pursue any claim against N2SH re the Warragul Leisure Centre project but as is usual under the contract reserves the right to do so should a valid reason arise’.
The defendant submits that as no claim has been brought, the offsetting claim is merely a potential claim that does not come within the definition of offsetting claims in the Act. The defendant relies upon the cases of Glenhawk and Hell Colour,[12] and a passage in Assaf’s Winding Up in Insolvency, referred to at paragraph 31 of this ruling, where the author states:
[I]f a claim of a company appears to be that the company will be entitled to damages arising from an event in future, then that claim is not one which falls within the definition of a genuine claim that the company has against a creditor.[13]
[12]Hell Colour (n 6) [29].
[13]Assaf (n 7) 481.
The authorities relied on in Assaf’s Winding Up in Insolvency make it plain that the question is whether the cause of action founding the offsetting claim exists at the relevant time, being when the s 459G application is made; that is, at the time the application is heard.[14] The cause of action ‘must have accrued and presently exist.’[15] This is to be contrasted with claims which have not presently accrued but may do so upon the happening of some future event, or the uncovering of further evidence. An example of the latter type of case is Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd,[16] where it was argued that a contract had been novated but there was at that stage no evidence of an inconsistent obligation substituted by agreement of the respondent. In that case, the Court held:
In reality the appellant’s case is that, if further evidence is able to be adduced, it expects to be able to establish that there is a genuine dispute. Put another way, in our view the appellant is really contending that there might be a genuine dispute but it cannot establish that there is a genuine dispute at this stage.[17]
[14]Ibid n 127; Brandon Industries (Vic) Pty Ltd v Locker Pty Ltd [2016] VSC 373, [13] (Gardiner AsJ) (‘Brandon’).
[15]Ibid.
[16](1997) 76 FCR 452.
[17]Ibid 465-6 (Northrop, Merkel and Goldberg JJ).
In Advance Ship Design Pty Ltd v D J Ryan t/as Davies Collison Cave (‘Advance Ship Design’),[18] the plaintiff engaged the defendant to act as its patent attorney. The defendant issued invoices in relation to professional services provided and subsequently issued a statutory demand based on those invoices. The plaintiff submitted that the defendant had acted negligently and in breach of its contract, as a result of which its patent application had been rejected. The plaintiff had filed an appeal in respect of the rejection of its patent application which had not been heard, as well as a proceeding seeking damages in consequence of the rejection of the patent application. It had also sought to raise its claim for liquidated damages in that proceeding as an offsetting claim to the amount claimed in the statutory demand. The Court rejected that submission because the question whether the plaintiff was entitled to damages depended upon the outcome of the appeal in relation to the patent. As that appeal had not been determined, the Court held that the offsetting claim that was alleged would sound only in nominal damages, and therefore did not constitute an offsetting claim.
[18](1995) 16 ACSR 129.
In Collier Nominees Pty Ltd v Consolidated Constructions Pty Ltd (‘Collier’),[19] the plaintiff engaged the defendant under a construction contract. Some of the work performed by the defendant collapsed, causing damage to an adjoining property. The adjoining property owner had corresponded with the plaintiff in relation to the damage caused, indicating that it held the plaintiff liable for that damage in the amount of $75,803, and threatened to commence litigation, although no litigation had yet been instituted. The defendant sought payment from the plaintiff pursuant to the building contract, and ultimately issued a statutory demand in respect of that amount. The plaintiff submitted it had an offsetting claim which included damage caused to the adjoining property. The defendant, on the other hand, submitted that the plaintiff did not have an offsetting claim because by the terms of the contract, the parties had agreed to postpone any such claim until after the payment of each amount required under the contract, and because no proceedings had been issued in relation to the damage to the adjoining property.
[19](Supreme Court of New South Wales, Santow J, 3 July 1998) (‘Collier’).
The Court rejected the defendant’s first submissions regarding the agreement to postpone any offsetting claim on the basis that an ‘offsetting claim’ for the purposes of a statutory demand proceeding included a cross demand. The Court held that it is still necessary to consider whether the contended cross demand is ‘contingent or future, in the sense of yet to crystallise as an accrued cause of action.’[20] In that regard, the Court held the question is whether there exists a combination of facts which entitles an action to be brought.[21] Once the facts are found to exist it is immaterial that the determination of whether there is a cause of action may need to be postponed to a future date by reason of some contractual provision.[22]
[20]Ibid 9.
[21]Ibid 14.
[22]Ibid.
The Court accepted the defendant’s second submission that as no proceeding had yet been issued in respect of damage to the neighbouring property, the asserted offsetting claim in respect of it was merely a ‘possible future claim’ and therefore does not qualify as an offsetting claim within the meaning of s 459H.[23] The Court held that:
At this point in time, a cause of action with respect to this claim is likely to accrue in the future, but it has not as yet presently accrued. The Plaintiff has yet to suffer the claim foreshadowed by [the neighbour] and that claim has yet to be ascertained by judgment or admission. Hence the basis of indemnity from the Defendant has yet to arise.[24]
[23]Ibid 16.
[24]Ibid 17.
Accordingly, the basis for the decision that the plaintiff did not have an offsetting claim was that the third party to whom it was said the plaintiff was liable had not issued any proceeding, and neither had the claim been ascertained by judgment or admission. That is a similar situation to the present one, where the plaintiff claims exposure to potential liability arising from delay costs but where the third party, being the Council, has reserved its rights in relation to any such claim but has not issued any claim.
The next case referred to in Assaf’s Winding Up in Insolvency is Seduce Pty Ltd v Trust Company (Australia) Ltd,[25] which concerns a contractual exclusion of a claim and is not relevant for present purposes.
[25][2015] WASC 441, [57] (Gething AM).
The final case referred to in Assaf’s Winding Up in Insolvency is Brandon Industries (Vic) Pty Ltd v Locker Pty Ltd,[26] in which this Court rejected an alleged offsetting claim. The defendant made claims against the plaintiff for the costs of the works performed and ultimately issued a statutory demand in relation to those amounts. The plaintiff submitted there was an offsetting claim having regard to alleged problems with the products that had been provided and the possibility of claims being made by the third party against the plaintiff in relation to those goods. The Court rejected the plaintiff’s submission in this regard on the basis that as at the date of trial, the third party had not made a claim against the plaintiff in respect of any matters which were the subject of the defendant’s invoices.
[26]Brandon (n 14).
In Glenhawk, Randall AsJ appears to have held that while the offsetting claim must be in existence at the time the application is heard, it is sufficient if the factual matrix for the claim which ‘might be prosecuted’ by the third party ‘is already in existence and has been foreshadowed or threatened’ by the third party, even if proceedings have not been issued by that third party.[27] In support of that proposition, Randall AsJ referred with apparent approval to the decision of Hell Colour,[28] which is also relied on by the defendant, in which Gardiner AsJ held that the plaintiff had established it had an offsetting claim even though that offsetting claim depended upon a third party filing suit, and even though at the time of the s 459G application the third party had not taken any action. It appears that the rationale in Hell Colour was that it was ‘probable that at some juncture the state of détente between [the parties] may pass and that there will be litigation … which will become tripartite proceedings involving [the relevant parties] and that is the appropriate venue in my view where the claims should be agitated and the balance of account determined.’[29]
[27]Glenhawk (n 5) [36].
[28]Ibid [37].
[29]Hell Colour (n 6) [29].
It is difficult to reconcile the authorities of Glenhawk and Hell Colour on the one hand, with Advance Ship Design and Collier on the other. The former cases appear to hold that the likelihood of a third party bringing proceedings against the plaintiff in relation to loss caused by the defendant may constitute an offsetting claim. The latter cases appear to hold that the mere likelihood or probability of a third party bringing proceedings cannot constitute an offsetting claim, and that an offsetting claim can only arise if the third party has in fact instituted proceedings against the plaintiff. On one reading Collier goes even further, holding that there is no offsetting claim against a defendant in such circumstances until the third party claim has been ‘ascertained by judgment or admission.’[30]
[30]Collier (n 22) 17.
The disparities between the authorities were not argued in detail before me, and having regard to the conclusions I have reached in relation to the genuine disputes, it is not necessary to express a view about them.
The plaintiff relies on the decisions of Alucraft, Critharsis and Westpoint for the proposition that where there has been a breach of a contract and a party, such as the plaintiff in this case, is exposed to liability to a third party as a result, the plaintiff’s cause of action accrues upon exposure to that risk, and not only upon proceedings being issued by that third party. It was submitted that the damages for such a claim would be quantified by reference to the estimated amount of loss caused by the breach, reduced having regard to the likelihood of a claim being made. It may loosely be described as an ‘exposure to risk claim’ which accrues upon the exposure to that risk, and not upon the realisation of that risk.
In Alucraft, a subcontractor sued the head contractor for the balance due under its contract to supply and install aluminium and steel windows and doors. The head contractor counterclaimed on the basis that the works were defective. The subcontractor responded by admitting defects but saying that the head contractor had suffered no loss because the works had not been rectified, four years had passed since they were completed, and the proprietor had not raised any complaint about the work. The head contractor succeeded in its claim for damages on the basis that:
[It did] not receive the benefit contracted for and is exposed to a loss or the risk of a loss the extent of which will depend upon subsequent events. Its damages are the higher of (a) the amount it paid for the defective work and (b) the cost of rectifying the defective work, discounted for the likelihood that it will not be called on to rectify.
The rectification cost was $35,000 and in the result, that cost was discounted to $5000, having regard to the risk that proceedings would be brought. Accordingly, the head contractor succeeded in its claim and received an award of damages calculated by reference to the risk that proceedings would be brought against it even though no such proceeding had been issued.
Critharsis involved a similar fact situation, where the head contractor sought to pursue a claim against a subcontractor on the basis that the subcontractor had done defective work and it was exposed to the risk of a claim by the proprietor arising from that defective work. At first instance, the Court rejected the head contractor’s claim on the basis that it was not exposed to any risk of a claim from the proprietor. The head contractor appealed that decision and sought to rely on Alucraft. The Court of Appeal referred with approval to the decision of Alucraft and noted that it had been referred to with approval by the New South Wales Court of Appeal in Westpoint at [16], but rejected the appeal point on the basis that the trial judge had found, as a matter of fact, that the head contractor was not exposed to any risk of a claim.
On the basis that the requirement for establishing an offsetting claim is that the cause of action has accrued and exists at the time the application is made, then following Alucraft and the appellate decisions of Westpoint and Critharsis, I find that the plaintiff has an offsetting claim characterised as a claim for breach of contract by the defendant, where the assessment of damages caused by the breach will be reduced by the risk that the Council will bring a proceeding against the plaintiff. The plaintiff’s exposure to risk is sufficiently demonstrated by the Council’s reservation of its rights.
The Court is required to determine the quantum of the claim for the purposes of an application under s 459H. Where the claim is for unliquidated damages, the Court is entitled to take a broadbrush approach, particularly where the margin between the amount claimed in the statutory demand and that claimed in the offsetting claim will not determine the application.[31]
[31] Assaf (n 6) 483-4 (citations omitted).
The plaintiff’s evidence as to quantum is constituted by Mr Hughan’s statement that:
I estimate the potential claim by Baw Baw Shire Council to be in the vicinity of $200,000 and $250,000 based on conversations with Wayne Hewitt and my experience generally in the sector.
While the hurdle for an applicant in establishing an offsetting claim for the purposes of s 459H is not a high one, the Court must exercise some caution. The defendant submits that there is no evidence as to quantum and no evidence that the defendant has caused the loss and damage, and that there is merely an assertion by Mr Hughan that the loss in relation to delays is in the vicinity of ‘some hundreds of thousands of dollars’. It is not quite correct to say there is no evidence, as Mr Hughan says he bases his estimate as to the potential claim on ‘conversations with Wayne Hewitt [from Council] and my experience generally in the sector.’ Having said that, the evidence is very brief and also lacking in detail. While the plaintiff is not required to calculate the quantum of an offsetting claim down to the last dollar, in determining the quantum of an offsetting claim, the Court is entitled to take into account the extent of the evidence adduced, having regard to what evidence might reasonably be expected to be available and readily produced, bearing in mind the nature of the application and limited timeframes involved. In this case, Mr Hughan could have recounted in summary the content of the relevant discussions he had with Mr Hewitt, and also set out how he arrived at the figure of $200,000-$250,000. Presumably some method was employed. I am guided by the approach taken in the decision of Federico’s Restaurant Pty Ltd v Warwick Entertainment Centre Pty Ltd,[32] where Lehane J said:
There is some meagre evidence of what the fixtures and chattels might be worth. First, there is the suggestion made at the meeting on 3 November and repeated in the documents prepared by Mr Tsaknis, and as altered by Mr Pender, that they might be sold for either $200,000 or a nett $200,000.[33]
…
I have of course as yet said nothing about the value to be attributed to the goods themselves. This is perhaps one of the most difficult aspects of the case, to the point almost of impossibility. Unfortunately, I do not think that the statute allows me simply to throw up my hands and say, as I might be tempted to, it is impossible. I think there is evidence, which cannot simply be dismissed, that at a point of time which might be relevant for these purposes, the goods may have had a market value of, or in excess of, $200,000.[34]
[32](1995) 18 ACSR 702.
[33]Ibid 705.
[34]Ibid 709.
Ultimately, his Honour accepted that although the evidence was meagre, that was not a sufficient reason to disregard it for the purposes of determining the amount of the offsetting claim. Similarly in this case, though the evidence as to the quantum of the delay claim is meagre, I do not consider that it can simply be dismissed for present purposes. Counsel for the plaintiff submitted that the appropriate discounts to be applied for the risk that a claim would be made by the Council is somewhere between 50 per cent and 80 per cent at most. Applying those discounts to the estimated loss of $200,000-$250,000 gives a range of $40,000 to $125,000 for the claim. Having regard to the resolution of the genuine dispute questions raised above, it is unnecessary to be more precise.
Is there an offsetting claim in relation to the Pembroke Stadium works?
In relation to the Pembroke Stadium works, the plaintiff submits that there were deficiencies in the design prepared by the defendant as well as delays in the project. Costs to remedy those problems is put at $21,797. The plaintiff relies on an email dated 10 February 2022 from Mr Russell Fox of Sorrell Council, which stated that the defendant had negligently documented the water supply to the stadium on the wrong side of the road and the cost to fix it was a total of $21,797. The plaintiff submits that it is exposed to liability to the Council in respect of this and that the defendant is in turn liable to indemnify the plaintiff.
Mr Noyce describes a conversation he says he had with Mr Fox on 10 August 2022 in which Mr Fox said that all fees to date on all issues with respect to the defendant’s delays had been resolved and there would be no issues with the defendant. In his subsequent affidavit, Mr Hughan describes a conversation that he says he had with Mr Fox on 19 September 2022, in which Mr Fox apparently gives a very different account of the conversation said to have occurred on 10 August 2022. According to Mr Hughan, in this conversation Mr Fox did not state that all issues with respect to the defendant’s delays had been resolved, nor that there would be no issues with the defendant. Further, Mr Noyce says that Mr Fox said that the defendant had cost the Council money and that there had been subsequent escalation costs associated with the defendant’s delays.
There is obviously a conflict in the affidavits as to whether any difficulties with the defendant’s documentation caused loss or damage which may give rise to a claim or whether the same may be said of any delays. They are not matters that are appropriately dealt with in an application of this sort. Accordingly, I am satisfied there is an offsetting claim in relation to the Pembroke Library works for the amount of $21,797.
Is there an offsetting claim in relation to the Darley Park works?
In relation to Darley Park, the plaintiff says that the defendant was engaged following the usual process to provide detailed design and construction documentation for the project. Mr Hughan says that on 22 December 2021, he received a call from a Mr Ryall from the Moorabool Shire Council in which Mr Ryall said the project had experienced cost blowouts of between $600,000 and $1 million and that the Council expressly reserved its right to claim set-off costs and/or pursue the plaintiff for damages as a result of the poor quality of engineering documentation and tardiness in issuing deliverables. Mr Hughan says that the primary cause of Mr Ryall’s complaints were delays and deficiencies with the defendant’s work and documentation. Mr Hughan says that the Council terminated the plaintiff’s contract because of these issues, causing the plaintiff lost revenue of $35,000 plus GST and its associated profit which he estimates to be $7092.80.
In response, the defendant says that the plaintiff’s contract with the Council was terminated because it was dissatisfied with the plaintiff’s performance. In support it relies on a letter dated 15 March 2022 in which the Council wrote:
It gives us no pleasure whatsoever to express our disappointment with the level of service being provided to the rate payers of Moorabool.
Carla, Corinne and I wish you the very best in your health and career, and I encourage you to take some time for self-reflection.
·It is always best to be honest.
·Please take responsibility for yourself.
·Encourage team input and open communication.
This email confirms our meeting this morning when we confirmed that we will not proceed with the engagement of your company for the remainder of the project.
Mr Noyce further says that the Council was not dissatisfied with the defendant’s performance and in fact invited it to take part in the contract administration phase on 10 May 2022.
It is apparent from Mr Hughan’s affidavit and this correspondence that there is a dispute in relation to the cause of problems on this particular project and the reason that the Council did not continue to engage the plaintiff. That is not a dispute that is properly resolved on the material before me in this application, and accordingly in my opinion the plaintiff has an offsetting claim in the amount of $7092.80, in relation to the Darley Park project, for the purposes of this application.
Is there an offsetting claim regarding Perth Early Learning Centre works?
In relation to the Perth Early Learning Centre, Mr Hughan says the defendant was engaged following the usual process to provide consultant services, for among other things, fire protection and hydraulic services, for a fixed fee of $30,030 inclusive of GST. Mr Hughan says that on 18 January 2022, Mr Trent Atkinson of the Northern Midlands Shire Council contacted him and said words to the effect that there were significant delays in the defendant liaising and coordinating with the relevant utilities and that there were multiple errors and changes required in the defendant’s documentation. Mr Hughan further says that on 15 July 2022 he spoke to Mr Atkinson again and that he said words to the effect that he was frustrated and disappointed with the defendant’s work including costs and delays resulting from mistakes by the defendant. Mr Hughan says that the Council has reserved the right to pursue the plaintiff for damages. The plaintiff submits that in this respect it has been exposed to potential liability by reason of the defendant’s breaches and that the defendant is liable to the plaintiff in respect of that.
In response, the defendant relies upon its own communications with the Council in which the Council states that it has not withheld any payments in relation to this project and that all invoices have been paid. The plaintiff replies that the email relied on from the Council says nothing about the exposure to liability claim.
I am prepared to accept that the plaintiff may be exposed to some risk of a claim from the Council in respect of these works, but there is no evidence as to the quantum of any such claim, so for the purposes of this application I would assess the quantum at a nominal value of $1.
Is there an offsetting claim in relation to the Chiltern Community Hub works?
The plaintiff says that on or about 8 October 2021 the Indigo Shire Council requested tenders for design and documentation services in relation to the Chiltern Community Hub. The plaintiff’s tender was accepted and in accordance with the usual process the defendant was engaged to provide detailed design and documentation services for a fixed fee of $32,120 inclusive of GST. Mr Hughan says that in conversation on or about 10 June 2022 Jayme Collins of Indigo Shire Council said words to the effect that the defendant had negligently and unilaterally increased the scope and inclusions in the electrical and fire engineering documentation, which had resulted in a variation in costs in excess of $124,504. Mr Hughan says he has reviewed the documentation and it is apparent to him that the defendant made unilateral changes between the tender and construction versions of their documentation to include additional speakers, internal and external lighting, power and data points, as well as audio-visual outlets, and a different type of fire detection system. Mr Hughan said these changes were not authorised pursuant to the defendant’s contract, and that the Indigo Shire Council has reserved the right to pursue the plaintiff for damages. On that basis, the plaintiff says it has been exposed to potential liability to the Council, and that the defendant is in turn liable to the plaintiff.
In response, Mr Noyce says that the drawings were changed but that they were changed in response to the plaintiff’s revised drawings and request, and further says that in a telephone conversation on 10 August 2022, Jayme Collins of the Indigo Shire ‘confirmed that they are not bringing a claim against [the plaintiff] and that all fees have been paid up to date.’ Mr Hughan explains by reference to the plaintiff’s invoicing practices and correspondence with the Indigo Shire Council that not all of its invoices in relation to this project have been paid and that the total fees being withheld and/or lost due to the plaintiff been terminated from the project is $33,850 plus GST, which Mr Hughan says would realise a lost profit of $7447 including GST.
The circumstances in which the documentation was provided and modified by the defendant, and the question whether the plaintiff has been paid for all its work on this project, and the question why the plaintiff was terminated from the project are not sufficiently clear that they can be resolved in this application. I return to the observation in Anderson, which is particularly apt:
Building disputes are notorious for their mind-numbing complexity and it must be a rare case where a challenge to a party’s claim will not be seen as giving rise to a genuine dispute.[35]
[35]Anderson (n 4) [23] citing John Holland 254.
This is not one of those rare cases.
Genuine dispute
The plaintiff submits that there is a genuine dispute in relation to 3 invoices: ADP59337, ADP57807 and ADP59053.
Is there a genuine dispute about invoice ADP59337?
In its statutory demand, the defendant says that $940.66 is due and payable pursuant to invoice ADP59337. The plaintiff says that this invoice was paid in full on 1 July 2022, which was prior to the statutory demand being issued. The plaintiff relies on an email of that date to Jason Afford confirming that these funds would be remitted as part of a larger total payment of $13,467.50, which was in fact remitted. This is a minor point and it was conceded by counsel for the defendant that it is hardly likely to be decisive. For the purposes of this application I am satisfied there is a genuine dispute about it.
Is there a genuine dispute about invoices ADP57807 and ADP59053?
In relation to these two invoices the plaintiff says that the client, Baw Baw Shire Council, has determined that the defendant has not yet completed the relevant works and that, accordingly, the Council has refused to make payment for them until the documentation is amended, reissued and endorsed by the building surveyor. In response, the defendant relies on emails dated 9 November 2021 and 1 June 2022, and his conversation with Mr Hewitt on 10 August 2022 in support of the submission that the work has been done and that the plaintiff has acknowledged a liability to pay these invoices. It is apparent from Mr Hughan’s affidavit that he takes issue with the defendant’s evidence and maintains that various works in relation to these invoices have not been completed. I am unable to resolve those questions with sufficient confidence to preclude a genuine dispute and accordingly I find there is a genuine dispute in relation to them.
Some other reason
As noted above, the plaintiff submits that the statutory demand should be set aside for some other reason pursuant to s 459J. Having regard to the conclusions I have reached in relation to genuine disputes considered above, and my obligations under the Civil Procedure Act 2010 (Vic), it is unnecessary for me to determine whether the statutory demand should be set aside for some other reason.
I am fortified in that conclusion by the observation in Anderson quoted above.
This is not one of those rare cases where the plaintiff’s challenge to the defendant’s claim does not give rise to a genuine dispute.
Conclusion
I will order that the statutory demand be set aside and that the defendant pay the plaintiff’s costs of the proceeding on a standard basis to be taxed in default of agreement.
0
6
0