04 September 2017
Samuel Woff: Commentator
Leighton Moon: Corrs Chambers Westgarth – Special Counsel
SAMUEL: You’re listening to Corrs High Vis, Corrs Construction podcast. I’m Samuel Woff. Today we’re going to be talking about a case – an interesting recent case where a senior employee of a construction company was found personally liable for a misleading and deceptive statutory declaration. I’m joined here today by Leighton Moon, Special Counsel. Leighton, thanks for joining me.
LEIGHTON: Thank you Sam.
SAMUEL: So if I can start with the obvious place. What was this case all about?
LEIGHTON: Well interestingly, Sam, the statutory declarations are commonly used to accompany payment claims in industry and head contractors will promise to principals that they have paid all the subcontractors and they’re a useful way for principals to make sure that the money is continuing to flow down to the subcontractors and that there won’t be any suspensions or issues at the subcontractor level. Unfortunately, it is quite common that the statutory declarations aren’t that well investigated by the head contractor - either accidentally or by design - and so it’s been quite difficult for principals to rely on them but in this case, it was found that the Chief Operating Officer of Reed Construction was personally liable for the statutory declaration which was very important because it meant that the principal could recover from him personally even though the head contractor, Reed, had gone into administration.
SAMUEL: The reason that this case is significant from my reading of it is that there is certainly a perception sometimes unfortunately that statutory declarations are sort of seen more as an administrative rubber stamp rather than something that has substantive legal consequences.
LEIGHTON: That’s right and the people giving a statutory declaration have been able to hide behind some of the caveats in a statutory declaration. For example, that if there is a dispute at subcontractor level they can “hand on heart” say that they believe that there is nothing payable to that subcontractor even though a proper analysis of the law and the fact at subcontractor level is that there is money owed to that subcontractor but that wasn’t enough to get across the threshold of perjury or a similar sort of criminal based causes of action against the deponent of the statutory declaration. Whereas this goes one step further and interestingly the Chief Operating Officer in this case was found personally liable because he made a promise that he had made all reasonable enquiries of his subcontractor payments and it was found that he had not made those enquiries and that is quite a different exercise to try to show that he was dishonest and perjured himself by knowing that the subcontractors were owed money but signing a statutory declaration to the opposite. So I think that’s quite important for the industry because it means whereas previously people could turn a blind eye or rely on disputes at subcontractor level to still issue the statutory declaration. This case suggests that they’re going to have to actually go to the site managers and contract managers at subcontractor level and confirm whether or not there are any amounts outstanding and by doing that they will either be armed with the knowledge that there are amounts outstanding or if they don’t do that then they leave themselves at risk of being personally liable and quite a significant personal liability in this case - $1.6 million – so they can be found personally liable and at risk of that.
SAMUEL: Thanks Leighton that’s interesting. So and in this case was the financial position of Reed which I understand they were in some fairly significant financial troubles. Was that relevant to the court’s decision about what was and wasn’t reasonable steps?
LEIGHTON: Well each misrepresentation is dealt with in its particular circumstances and so by making a representation that there is no money owing to subcontractors and making a representation that you’ve made all reasonable enquiries what will be a reasonable enquiry will be informed by the surrounding circumstances and if it is known to the person giving the statutory declaration that there are financial issues in other parts of the business then that would inform what a reasonable enquiry would be for the specific part of the business of the subcontractors. The same issues arises with any representation about an opinion because by giving a representation about an opinion there is also an implied representation that you have reasonable grounds for that opinion so I would’ve thought in this instance by analogy the fact that there was financial stress within the company would mean that there was less chance that the deponent would be able to show that he had reasonable grounds for making that misrepresentation even on the implied representation underlying his opinion.
SAMUEL: So in this case did the court find that there was any dishonesty or was it something less than that?
LEIGHTON: There was no finding of dishonesty to the extent that the court found the Chief Operating Officer knew that money was outstanding to the subcontractors but what the court did find was that he had not made the reasonable enquiries that he had promised he did. The reasons for him doing that when you read the judgment is simply because he was a senior management person in the midst of a company that was facing severe financial stress and obviously his plate was quite full and had not done the sort of enquiries that perhaps he would’ve done if he had more time in his working day than then. So importantly, no, he was still found personally liable even if he had an honest subjective belief that there was no money owing to the subcontractors because the court relied again on the fact that he hadn’t made the reasonable enquiries that he promised both expressly and also impliedly.
SAMUEL: So what do you foresee being the things that are going to change in the industry as a result of this decision?
LEIGHTON: Well obviously head contractors are going to be reluctant to sign up to contracts where they or their officers and directors have to give personal statutory declarations and expose themselves to personal liability. Unfortunately, for those head contractors there’s certain parts in the industry where that’s just simply not possible. Many contracts and standard form contracts with government agencies require that, for example, in New South Wales under the new Security of Payment Changes that came in recently the payment claims are required to be accompanied by statutory declarations. So I suspect in those instances the head contractors will simply try to write down their statutory declaration and caveat with ways that allow them to rely on the disputes at subcontractor level that we discussed and other matters which would show that the statement is both true and also is not misleading in all the circumstances.
An example of that might be that they will, rather than say I’ve made all reasonable enquiries, they will list what enquiries they’ve done: I’ve looked at our cost records, I’ve spoken with the site manager and I honestly believe that there is no amount owing. So I suspect that might be something that happens. The other thing that will be interesting to observe is what happens in the D&O insurance market because in this case there was a related proceeding where the Chief Operating Officer was able to claim the $1.6 million from his D&O insurance and it would be interesting to see whether D&O insurers now write exclusions in their insurance policies or seek to limit their exposure to these sorts of claims which given that there is hundreds and hundreds and hundreds of statutory declarations submitted each month with each payment claim you would expect that this sort of case will be pursued quite often in the future.
SAMUEL: Well it has been an interesting case. So just to recap what would you say would be the three key takeaways?
LEIGHTON: Well, firstly and most obviously, head contractors, employees and officers should be aware that they do face this personal liability. Secondly, people who are giving those statutory declarations should be making all reasonable enquiries because that is what they’re promising to do either both expressly or impliedly and thirdly, if they are concerned about payments due to subcontractors they either need to note that concern in the statutory declaration or fess up that there is outstanding money to the subcontractor and explain the reason for that to the principal in the statutory declaration and lastly, I would suggest people who do this commonly should make sure that they have an appropriately worded standard statutory declaration that they use to make sure that they’re not inadvertently exposing their employees and officers to this sort of personal liability.
SAMUEL: Great so there you have it. It’s certainly a case that is going to raise a few eyebrows and keep people on their toes as to making statutory declarations in the future. Thank you Leighton for joining me and thank you listener for tuning in. We hope you will join us again next time for Corrs High Vis. Until then goodbye and of course please note that this podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.
This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.