Case Alert - Statutory Demands - Issue at Your Own Risk

Tesoro MB Pty Ltd v Total Building Group Pty Ltd [2009] FCA 802 demonstrates the risks of issuing a Statutory Demand based upon an adjudication made under the Security of Payment legislation in place in most States (Security of Payment Act).

In the judgment, Logan J of the Federal Court ordered Total Building Group Pty Ltd (Total Building) to pay the costs incurred by Tesoro MB Pty Ltd (Tesoro) in making an application to set aside a Statutory Demand issued by Total Building on an indemnity basis. 

Total Building had obtained a favourable adjudication against Tesoro under the Queensland Security of Payment Act and then registered a judgment against Tesoro in the District Court of Queensland based on that adjudication. 

Total Building then issued a Statutory Demand against Tesoro for part of the judgment debt.  On receipt of the Statutory Demand, Tesoro’s solicitors wrote to Total Building and pointed out, amongst other things, that their client had an offsetting claim against Total Building which would render the Statutory Demand liable to be set aside.

Tesoro filed an application in the Federal Court to set aside the Demand.  At the commencement of the hearing, Total Building confirmed it had withdrawn the Statutory Demand thereby leaving costs as the only issue to be decided.

In his reasoning, Logan J found that it was “imprudent” for Total Building to have put Tesoro to the expense of having to set aside the Statutory Demand, in light of the fact that:

1. there was information already available to Total Building that indicated there was substance to Tesoro’s position that it had a genuine offsetting claim and the Statutory Demand was liable to be set aside;

2. correspondence detailing that position had been sent by Tesoro’s solicitors to Total Building’s solicitors before the proceedings to set aside the Statutory Demand were commenced; and

3. Tesoro had no option but to bring an application to set it aside, or risk being deemed insolvent under the Corporations Act 2001 (Cth).

The New South Wales Security of Payment Act is sufficiently similar to the Queensland Act similar such that New South Wales authorities were applied by Logan J.

Whilst the issue of costs is always discretionary, the decision in the Tesoro proceedings is a warning to parties who seek to maintain a Statutory Demand despite being in possession of information which supports an argument that the Statutory Demand should be set aside. 

The courts recognise that judgments based on adjudications under the Security of Payment Acts are in effect provisional judgments.  The intent of the Security of Payment Acts is to implement a statutory “pay now argue later” regime for the determination of matters arising out of a “construction contract“.  Because arguments that do not arise out of a “construction contract“ (eg. set-off) are outside their scope, adjudications under the Security of Payment Acts do not necessarily determine the final legal position as between the parties.

The Tesoro decision is consistent with earlier case law such as the decisions of White J in Plus 55 Village Management Pty Ltd v Parisi Homes Pty Ltd [2005] NSWSC 559 (3 June 2005) and Ettamogah Pub (Rouse Hill) Pty Limited v Consolidated Constructions Pty Limited (in liq) [2006] NSWSC 1450.  In these decisions the courts found that although there may be no “genuine dispute” as to liability under the judgment arsing out of an adjudication, when faced with a Statutory Demand the judgment debtor may raise an “offsetting claim” based on additional arguments which could not be considered by the adjudicator. 

The reasoning of Logan J is not limited to Statutory Demands issued in reliance upon adjudications under the Security of Payment Acts.  It can be applied whenever a Statutory Demand is issued.  If the recipient raises an offsetting claim you need to think very carefully before refusing to withdraw the Statutory Demand.  If the recipient applies to set aside the Statutory Demand and your refusal is found to be “imprudent” you may be ordered to pay their costs on an indemnity basis.

For more information please contact Kylie Rae on +61 2 9225 2703 or email raek@kempstrang.com.au.