A ‘genuine dispute’? The crossover between insolvency and construction disputes in Western Australia
Introduction
The recent decision of the Supreme Court of Western Australia in Sovereign Building Company Pty Ltd v Sheehan Group Pty Ltd [2025] WASC 11 provides an interesting and topical examination of how the issuing of a statutory demand under the Corporations Act 2001 (Cth) (Corporations Act) interacts with the dispute resolution mechanisms contained in the Construction Contracts (Former Provisions) Act 2004 (WA) (CCA).
The Court’s decision considered whether a statutory demand issued by the defendant, Sheehan Group Pty Ltd (Sheehan), upon the plaintiff, Sovereign Building Company Pty Ltd (Sovereign), should be set aside on the ground that there was a ‘genuine dispute’ as to the amount claimed. This ground was based on questions arising around the quality of Sheehan’s work and whether Sheehan was liable for an amount exceeding the statutory demand claim by way of its repudiation of the various agreements entered into by the parties.
Key Takeaways:
This decision highlights:
(1) the utility of the CCA dispute resolution process if it is followed through to adjudication (in particular, the adjudication determination once filed with the Court having the force of a judgment debt);
(2) that the issuing of a statutory demand does not circumvent the dispute resolution procedures of the CCA; and
(3) that seeking to recover a debt prematurely via the statutory demand process will be fatal to the recovery strategy invoked by the creditor.
Facts
Sovereign was a construction company that engaged Sheehan to complete electrical works at a number of job sites around Perth. The parties never entered into a formal written contract, but the Court held that the practice of Sheehan issuing a quote, followed by Sovereign issuing a purchase order that accepted the price quoted, constituted various binding agreements between the parties.
A dispute arose between the parties when, due to the rising costs of materials and wages, Sheehan purported to increase its rates originally provided for in the quotes. Sovereign disputed this price increase, based on a term of the purchase orders which in effect prevented Sheehan from doing so.
Sovereign interpreted Sheehan’s price increase as a repudiation of the contract and subsequently terminated a number of works agreements and engaged a third party electrical contractor to complete the work that Sheehan was yet to complete at the relevant work sites.
In response to Sovereign’s conduct, Sheehan issued a number of payment claims for amounts unpaid by Sovereign, marked as being issued pursuant to the CCA. Sovereign failed to respond to these payment claims, leading to Sheehan issuing a statutory demand based on the payment claims.
Operation of the CCA and the Corporations Act
Clause 5(1) of Division 4 Schedule 1 of the CCA
This provision of the CCA creates a regime that allows a dispute resolution mechanism to be implied into ‘construction’ contracts that do not expressly include a provision for a party to make a claim for payment.
This mechanism functions broadly as follows:
(1) a party issues a payment claim, stipulating that payment is to be made within 28 days;
(2) the party receiving the claim must dispute or reject the claim within 14 days of receiving it; and
(3) if the claim is not disputed or rejected, or payment is not made within 28 days, a ‘payment dispute’ arises, which entitles the party issuing the claim to make an application to have the dispute determined by an adjudicator.
An adjudication determination can be filed with the Court, to make it an order of the Court, meaning that the mechanisms of the Civil Judgments Enforcement Act 2004 (WA) can be engaged to recover the debt.
In this case, Sheehan issued the payment claims but failed to make use of the adjudication mechanism of the CCA, instead electing to issue a statutory demand based on the payment claims. His Honour Justice Lundberg held that the lack of a determination under the CCA did not preclude Sheehan from utilising the statutory demand procedure, but it did allow Sovereign to rely upon the ‘genuine dispute’ ground to have the statutory demand set aside, to the extent that the evidence supported such an argument.
Section 459E of the Corporations Act
This provision creates a regime allowing a party to issue a statutory demand that a debt owing is paid within 21 days, forcing the other party to either pay the debt or make an application to have the demand set aside.
Section 459G allows the party who was issued the demand to have it set aside if there is a ‘genuine dispute’, which relevantly includes disputes as to the amount of the debt, or whether there is a valid offsetting claim that can be relied upon.
Issues determined by the Court
In coming to a determination of whether the statutory demand should beset aside, the Court examined a number of issues, including whether Sovereign’s lack of conferral with Sheehan prior to the action being brought could invalidate the claim and whether there was a ‘genuine dispute’ as to the amount claimed in the demand, and whether there was a valid offsetting claim that Sovereign could reply upon.
Waiver of the conferral requirement
Order 59 Rule 9(1) of the Rules of the Supreme Court 1971 (WA) requires parties to confer on the issues in dispute before an application “in chambers” is made, to ensure that the dispute cannot be resolved without the intervention of the Court.
Justice Lundberg invoked the power of the Court to waive the conferral requirement, on the grounds that given the nature of the proceedings, it would have been highly unlikely that conferral would have resolved any of the issues in dispute, and certainly would not have resulted in the plaintiff not makingthe application to set aside the demand.
The existence of a ‘genuine dispute’
The key role of the Court in determining whether there is a ‘genuine dispute’ is not to finally resolve the issues between the parties or undertake a ‘trial-like’ assessment of the evidence, but rather to determine whether there is “a plausible contention requiring investigation”, in respect of the amounts claimed by the defendant in the statutory demand.
In determining this, the Court firstly found that:
(1) Sovereign’s termination of the agreements following Sheehan’s contention that it would increase its rates was valid; and
(2) Sovereign’s failure to comply with the CCA through not issuing notices of dispute did not preclude it from claiming that there was a ‘genuine dispute’.
Justice Lundberg distilled the ‘genuine dispute’ issue into the question of whether Sheehan has a valid claim for payment, in the circumstances that the contract has been terminated, there were issues raised as to the quality of work undertaken, and where Sovereign had engaged a replacement contractor to perform works that may overlap with the works said to have been completed by Sheehan. The Court came to the conclusion that the plaintiff had established a “plausible contention requiring investigation”, meaning that there was a genuine dispute as to the amount demanded.
The existence of an offsetting claim
Lastly, Sovereign argued that an offsetting claim existed, based on its valid termination of the agreements, forcing it to employ a replacement contractor to complete the works, costing an amount which exceeded the amount that was claimed by Sheehan in the statutory demand.
The Court quantified the offsetting claim to the amount of $71,061.46, which exceeded the $45,549.30 claimed in the statutory demand, resulting in the statutory demand being set aside in any event.
Key Takeaways
In addition to the above, it is clear that the strategy for recovering debts needs to be considered meticulously to achieve the desired outcome. In this case Sheehan failed to do so, by issuing a statutory demand too early in the debt recovery process, which in this case likely resulted in an adverse cost outcome being given against them.
If you need legal advice on statutory demands, you can get in touch with our experienced legal team.
