TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 118

What the court decided

TFM Epping Land Pty Ltd and Katoomba Residence Investment Pty Ltd (the Developers) contracted with Decon Australia Pty Ltd (the Builder) to design and build a residential development in Epping [1], [6]. The Builder served a payment claim under section 13 of the Act for $6,355,352.46, and the Developers served no payment schedule in time [8]. On 11 October 2019 Henry J gave judgment for the Builder in the amount of the payment claim [14], [15]. The Developers' appeal was dismissed on 14 May 2020; a stay of execution had been in place meanwhile [16].

The Builder had also sued for the same amounts in the Technology and Construction List in May 2019 [11]. By consent, the Developers were directed to file any cross-claim by 2 August 2019 [12]. They filed one on 18 May 2020, four days after their appeal failed, alleging that the Builder had no entitlement to the retention or the variations and was liable for defects and damages [18]. Relying on it, they sought a further stay, saying that they could not pay the judgment debt, that they would be insolvent without a stay and that their cross-claim exceeded the debt [2], [19]. They did not suggest that the Builder would be unable to repay, and they did not propose to pay anything into court [27].

Stevenson J heard and dismissed the application for a further stay [3]. His Honour accepted that there was a serious question to be tried on the cross-claim and that, considered in isolation, the balance of convenience favoured a stay [29]. But he said there were "anterior matters" telling against a stay, and treated them as dispositive [30]. They were the Developers' unexplained delay in bringing the cross-claim, and the inconsistency with the Act's scheme of relying on their own insolvency to stay the judgment [32], [33], [35], [36].

The Court of Appeal heard the leave application and the proposed appeal together and refused leave with costs shortly after hearing submissions on 16 June 2020, giving its reasons later [4]. Because the decision under appeal was interlocutory, leave would generally be granted only for an issue of principle or public importance or for reasonably clear error causing injustice [69]. No reasonably clear error was suggested, and the only point of principle advanced was whether a "Grosvenor stay" applied [70]. In the Court's view, applying an established principle to particular facts is a different thing from raising a principle that is contested or uncertain [70].

The Court explained that Grosvenor Constructions (NSW) Pty Ltd (in administration) v Musico concerned a stay where the principal had a countervailing claim and the builder might not be able to repay if it succeeded [72]. Nothing in the principles McDougall J stated in Veolia Water Solutions & Technologies (Australia) Pty Ltd v Kruger Engineering Australia Pty Ltd suggested that they apply where a judgment debtor cannot pay [72], [74]. A cross-claim made worthless because the paid party could not meet a later judgment bore no comparison to the Developers' case that, because they would become insolvent, their cross-claim might never be litigated [75]. Nor was any risk to the Builder's solvency suggested, which strongly distinguished Grosvenor [76].

The Court said that the policy of the Act pointed the other way: its basal purpose is a speedy determination pro tem so that progress claims are paid promptly, and nothing in it makes a judgment obtained under it less enforceable than any other [77], [78], [80].

The Court accepted that section 32 alters the quality of such a judgment, so that it creates no res judicata or issue estoppel [82]. But it held that section 32 speaks only to the parties' legal rights, not to the practical effect on them [84]. Its operation could not turn on whether a developer faced a liquidity crisis or had deep reserves, since that would make the qualifications in section 32 vary with the parties' finances [84]. If a liquidator were appointed, the Developers would keep the same rights to prosecute the cross-claim, although the decision to pursue it would pass to the liquidator [85]. The Act's focus on payment of progress claims told against a stay sought by a developer that had neither paid nor served a payment schedule [86].

The Court did not deny that a stay of such a judgment may be granted in an appropriate case [87]. It agreed with N Adams J in Bellerive Homes Pty Ltd v FW Projects Pty Ltd that a stay will generally be less readily available for judgments entered after an adjudication under the Act than for appeals from curial proceedings [87], [88]. A court may still intervene, with caution, if irreparable prejudice is likely and refusing a stay would make permanent, in its practical effect, what the legislature intended to be interim [89]. The onus rests on the party seeking to prevent the ordinary operation of the processes the Act authorises [90].

Applying that approach, the Court held that the Developers had not discharged the onus [90], [102]. At the hearing, the Developers' senior counsel was confronted with gaps in their evidence [64]. The latest financial statements were unaudited special purpose statements that left out the position of the holding company, and there was no evidence whether the sole director or the holding company would fund payment of the judgment debt, or whether those standing behind the Developers would fund a liquidator [64]. The Court rejected the submission that funding of the litigation by a related party was irrelevant, although it accepted that a stay might still be appropriate in some such cases, possibly on terms [93], [94]. A debtor seeking a stay because it would otherwise be insolvent, while suing the creditor with others' money, left the creditor denied its rights and exposed to costs it might never recover [94].

To show that refusal would lead to their winding up, the Developers had to show that those standing behind them, who appeared to have funded the litigation so far, were unwilling or unable to let them pay the judgment debt, and the evidence fell well short of that [97]. The Court drew an analogy with a claimant resisting security for costs on the ground of stultification, and said the position was a fortiori on an application to stay execution of a final judgment [98], [99].

Even if liquidators were appointed, they could be presumed to consider the cross-claim's merits and decide rationally whether to pursue it, and it had not been shown that the existing funding would not be available to them [100]. The Court also referred to a ready market in litigation funding for a liquidator if the claim were worth pursuing [101]. The stay sought would last until the Construction List proceeding, in which pleadings had apparently not closed, was determined; its likely length would greatly prejudice the Builder [102].

The Court said the primary judge's criticism of the Developers' delay was "amply justified" [103]. The Developers had breached the direction to file any cross-claim by many months and gave no evidence explaining why [104], [105]. Their senior counsel accepted that there had been non-compliance with section 56 of the Civil Procedure Act 2005 (NSW) [66]. The only question of principle the Developers identified was not made out, and their failure to show that refusing a stay would stultify the cross-claim, a point going beyond the primary judge's reasons, was a further reason to refuse leave [106]. The Court declined to examine their complaints about the assessment of the cross-claim's strength, since those issues may go to trial [107].

Why it matters

Under the Act as it then stood, the Court of Appeal treated a developer's inability to pay a judgment obtained under the Act as no basis for a stay on the Grosvenor principles, and held that section 32 did not support an argument based on the consequences of the developer's insolvency. A judgment debtor seeking a stay on that footing bore the onus of showing that refusal would have the practical effect of stultifying its claim, and the Court looked for evidence of whether those standing behind it could fund the debt. Funding of the litigation by a related party was not irrelevant to the discretion, and unexplained delay in bringing the cross-claim weighed against a stay.

The reasons were given in refusing leave to appeal from an interlocutory decision. Readers should check the current Act and later authority before relying on them.

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.