Total Construction Pty Ltd v Kennedy Civil Contracting Pty Ltd (subject to a Deed of Company Arrangement) [2023] NSWCA 306

What the court decided

Kennedy Civil Contracting Pty Ltd was engaged by Total Construction Pty Ltd under a contract of 22 February 2022 for demolition, excavation and pavement works on a project at Arndell Park [2]. Between February and June 2022 Kennedy served four payment claims through the PayApps system that the contract required [11]. Total replied to each with a payment schedule and paid the amount it had scheduled [11]. Kennedy went into administration on 1 August 2022 [13]. Total answered Kennedy's payment claim of 4 August 2022 by scheduling a negative amount, so it paid nothing on that claim [13].

On 25 October 2022 the solicitors for the administrators emailed Total a letter, under a subject line beginning "Letter of Demand" [14]. The letter said that the company's books and records indicated that Total was indebted to it for $545,353.18 [15]. It demanded payment into the solicitors' trust account by 5 pm on 1 November 2022 [15]. It added that, if payment was not made, the solicitors expected to be instructed to sue for the amount as a statutory debt under section 15 or 16 of the Act [15]. Attached were tax invoices made on or about the date of the letter by updating invoices that had accompanied the earlier payment claims [16]. Each attached document bore a notation that it was a payment claim under the Act [16]. It was common ground that Total served no payment schedule in the 10 business days after it received the letter [3].

Kennedy sued Total in the District Court on 23 November 2022 [3]. On 18 August 2023 Abadee DCJ held that the letter and attachments were a payment claim under section 13 and, as no payment schedule had been served, gave judgment for Kennedy [4]. The trial judge had regard to the context, including the use of PayApps under the contract and the fact that the invoices were updated versions of invoices earlier served as payment claims [20]. He considered that paragraph 6 of the letter would alone have conveyed that Kennedy intended to engage the Act [24].

On appeal, Mitchelmore JA gave the reasons, with which Meagher JA and Adamson JA each agreed [1], [41]. Mitchelmore JA treated the objective characterisation of the documents, the subject of Total's first ground, as decisive [27].

Mitchelmore JA identified the features of the letter bearing on how a reasonable reader in Total's position would understand it [29]. The letter came from solicitors acting for the administrators and asserted that Total was "indebted" to Kennedy [29]. The reasonable inference was that the attached documents were said to support a current indebtedness [29]. The letter gave Total five business days to pay, which was shorter than the 10 business days the Act allowed for a payment schedule [29]. It directed payment into the solicitors' trust account, whereas Total had paid Kennedy itself on the earlier claims [29]. It foreshadowed proceedings without further notice, and it urged early resolution "without the need for further recovery action" [29]. Having regard to those features, Mitchelmore JA held that the letter read "objectively, and obviously" as a letter of demand for an outstanding debt, with recovery proceedings likely to follow if it was not paid [30].

Kennedy relied on the letter's reference to sections 15 and 16, which come into play only where no payment schedule is served or a scheduled amount is not paid [31]. Mitchelmore JA accepted that Kennedy had described those provisions correctly [31]. The court held, however, that the context did not lead "inexorably" to the reading Kennedy urged [31]. The same paragraph threatened proceedings on a deadline that took no account of the statutory time for a payment schedule, and the next paragraph encouraged Total to settle to avoid recovery action [31].

In the court's view, the invoices served only to support the characterisation of the letter as a demand [32]. Although they were created on or about 25 October 2022, each bore a date well before then [32]. Four of the five referred to an amount already paid and stated the balance due, and only one described the work in any detail [32]. Their payment details showed their historical nature, as Kennedy was by then in administration and the letter directed payment into the solicitors' trust account [32]. Mitchelmore JA saw force in Total's submission that the notation on each invoice was, given its date, of no more than historical significance, particularly when read with the letter [33].

The court noted that the trial judge emphasised the context and what Total would subjectively have understood [34]. On the least informative invoice, he had relied on the evidence of Total's contract administrator, who said he had understood the amount claimed to match an earlier payment claim [34]. Apart from its notation, nothing on the face of that invoice indicated the construction work to which it related [34]. Mitchelmore JA accepted that a "fair but broad" approach applies, that payment claims are read in context and that work may be identified by reference to earlier documents [35]. The approach must nonetheless be fair, reading the documents as a whole, "for which context cannot be a substitute" [35].

Kennedy also relied on a passage, set out by the court, from Hodgson JA's reasons in Nepean Engineering Pty Ltd v Total Process Services Pty Ltd (In Liq), which said that a respondent could state in its payment schedule that it did not propose to pay for work it could not identify [36]. Mitchelmore JA regarded that reliance as misplaced in this case [37]. The one detailed invoice had to be read with the covering letter and the other invoices, and so read the documents were not a payment claim within section 13 [37]. It followed that the trial judge erred in concluding otherwise [37].

Mitchelmore JA added that a letter of demand might, in other circumstances, satisfy the requirements of section 13 [38]. The court referred to a first instance decision in which Richmond J, considering an administrator's letter and attached invoices as a whole, rejected a submission that the letter was one of demand rather than a payment claim [38]. The conclusion in this case likewise depended on reading this letter and its attachments objectively and as a whole [38].

It was unnecessary to decide Total's second ground, which concerned compliance with section 13(2) [26], [39]. Nor did the court decide Total's further contention about whether sections 13(5) and 13(6)(b) allow a payment claim to include an amount already claimed [6], [39]. The parties told the court that they had agreed what should happen, if the appeal succeeded, to any money Total had paid Kennedy on the claim [40]. The appeal was allowed with costs, and the parties were directed to file short minutes of any further orders by 2 February 2024 [40].

Why it matters

The court characterised the letter and its attachments by reading them objectively and as a whole, and said that context cannot be a substitute for reading the documents as a whole. On the combined features of this letter and its invoices, a solicitors' demand for an asserted debt was not a payment claim, even though each attached invoice said it was made under the Act. The court did not hold that a letter of demand can never be a payment claim, and it left open the questions about section 13(2) and about including amounts already claimed.

The court set out section 13 of the Act as it stood when the contract was made [7]. Readers should check the current Act and later authority before relying on it.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.