The impact of settlement agreements on claims under the SOP Act
A case was recently handed down concerning the issue of whether a party who serves a payment claim but who settles such claim with the other party for a lesser amount, abandons its rights from enforcing the payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).
Reward Interiors Pty Ltd (Reward) was the builder who engaged the subcontractor, Master Fabrication (NSW AU) Pty Ltd (Master), to carry out works in relation to the construction of a primary school.
On 29 February 2020, Master served a payment claim on Reward for $556,285.61. Reward did not serve a payment schedule in response. On 31 March 2020, Master informed Reward that the total amount payable for the progress claim for February was $202,066.81. On 31 March 2020, Master served a further payment claim on Reward for $266,570.81 (March Payment Claim), which included the unpaid amount of $202,066.81 from the February progress claim. Again, Reward did not serve a payment schedule in response to the March Payment Claim.
On 21 April 2020, the parties held a meeting. Reward alleged that an agreement was reached at this meeting that Reward would pay to Master the amount of $202,066.81 (Settlement Sum) in full satisfaction of the March Payment Claim (Settlement Agreement).
On 22 April 2020, Reward paid Master the Settlement Sum (consistent with the terms of the alleged Settlement Agreement).
Reward sued Master for damages arising out of the work done by Master. Master brought a cross claim against Reward, claiming that it was owed $64,504 for the March Payment Claim and that the Settlement Agreement was void due to section 34 of the SOP Act. Section 34 of the SOP Act contains the ‘contracting out’ provision of the SOP Act, which provides that any agreement or contract is void if it:
- excludes, modifies or restricts the operation of the SOP Act; or
- might reasonably be construed as an attempt to deter someone from being able to take action under the SOP Act.
(‘Contracting out’ clauses in similar terms to section 34 of the SOP Act exist in most Australian jurisdictions’ security of payment legislation.)
Stevenson J held that Master had the choice to either:
- seek judgment against Reward for the full amount set out in the March Payment Claim as Reward did not serve a payment schedule in response; or
- enter into an agreement with Reward where Reward would pay the Settlement Sum in full satisfaction of the March Payment Claim as per the Settlement Agreement (assuming that the Settlement Agreement was made).
Master chose to enter into the Settlement Agreement.
Once Master received the Settlement Sum (ie, Reward provided its consideration and met its end of the bargain), Master could not exercise what would otherwise be its rights under the SOP Act to seek judgment for the amount claimed in the March Payment Claim.
Stevenson J held that the Settlement Agreement did not purport to exclude, modify or restrict the operation of the Act for the purposes of s 34 of the SOP Act. Rather, the Settlement Agreement acknowledged the operation of the Act ‘but records the parties’ agreement that, in the particular circumstances, their rights will be instead governed by their agreement’. As such, Master’s cross claim was dismissed with costs.
The key lessons from this case include that:
- A party may be unable to enforce its rights under the SOP Act to recover the full amount of a payment claim(s) if it chooses to settle for a lesser sum in satisfaction of the full amount of the payment claim. It follows that any party receiving a payment claim may settle such claim and seek to document a legally binding agreement between the parties. This may be particularly useful if the recipient of a payment claim fails to issue a payment schedule within the required timeframes and, as a consequence, is in a prejudiced position in the event that the claimant seeks to enforce the payment claim.
- Settlement agreements and compromises of payment claim(s) may not be void even if, as part of such a bargain, a party gives up its rights claim under the SOP Act to pursue payment claims and associated rights.
- Care should be exercised before entering into any settlement agreement or similar to settle any claims in relation to payment claims. Legal advice should be sought on the terms of the settlement including as to the scope of the agreement and release, the impact on payment claims and on the rights of the parties under the SOP Act (noting the possibility of subsequent disputes as to other matters arising from the project, construction contract and works such as disputes as to defective or incomplete works, breach of contract claims and the like).
Reward Interiors Pty Ltd v Master Fabrication (NSW AU) Pty Ltd  NSWSC 1251 (14 September 2020)
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This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.