Amongst the peculiarities of the Victorian security of payment legislation is the restriction on the types of variation claims that may be made, and adjudicated upon. The ability to claim for disputed variations is restricted, depending on the contract’s value and whether it contains a ‘method of resolving disputes’.

On 26 May 2016, the Victorian Court of Appeal confirmed mediation is not a ‘method of resolving disputes’ for the purpose of s 10A(3)(d)(ii) of the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act). The Court also confirmed a superintendent’s valuation under the contract is not binding upon the adjudicator when determining the amount of a progress payment.

What's happened?

Under s 10A(3)(d)(ii) of the SOP Act, disputed variations cannot be claimed or adjudicated upon where the original contract sum exceeds $5 million and the contract does not contain a method of resolving disputes.

In SSC Plenty Road v Construction Engineering (Aust) [2016] VSCA 119, the Court of Appeal considered an application for judicial review of an adjudication determination arising out of a construction contract for the design and construction of a shopping centre. The contract price was $35 million. The dispute resolution clause in the contract provided that if a dispute arose:

• the parties' senior executives were required to meet to try to resolve it
• if not resolved at the meeting, the dispute was referred to mediation
• if not resolved at mediation, the parties could pursue their rights at law.

One of the issues considered by the Court of Appeal was whether the contract contained a ‘method of resolving disputes’ for the purposes of the SOP Act.

The adjudicator had determined the dispute resolution clause in the contract did not contain a ‘method of resolving disputes’, so he was free to consider and determine disputed variation claims made by the contractor.

The decision at trial

The trial judge held that mediation was not a method of resolving disputes for the purposes of the SOP Act. The mediation process required by the contract was not a ‘method of resolving disputes’ in the absence of additional ‘mandatory steps involving the production of a binding decision by a third party appointed under the construction contract’.

Vickery J contrasted mediation with the dispute resolution process culminating in arbitration and binding expert determination sometimes prescribed in construction contracts. His Honour stated that these mandatory procedures ‘which result in the production of a binding decision by a third party’ bring them within s 10A(3)(d) of the Act as ‘methods of resolving disputes’.

It was also held that valuations made by the superintendent pursuant to the valuation regime under the contract were not binding on the adjudicator in valuing a progress payment.

The appeal

The Court of Appeal considered:

• whether mediation is a ‘method of resolving disputes' within the meaning of s 10A(3)(d) such that the adjudicator was wrong to have considered the contractor’s disputed variation claims
• whether valuations made by the superintendent are binding upon the adjudicator when determining the amount of a progress payment.

With respect to the first question, the Court of Appeal agreed with Vickery J that a ‘method of resolving disputes’ is a method that will result in an actual resolution of the dispute, rather than offering a forum for discussion of controversies.

Because s 10A(3)(d) has the effect of removing some disputed variations from the ambit of the Act, the ‘method of resolving disputes’ must provide the same degree of certainty the Act gives to claims which fall within its ambit. A non-binding process like mediation, which may or may not lead to a resolution, does not provide that certainty.

With respect to the second question, the Court rejected the appellant’s argument that a valuation made by the superintendent was a valuation made according to the provisions of the construction contract, and was therefore binding on the adjudicator. It agreed with Vickery J, the adoption of the superintendent’s valuation would be ‘inconsistent with the adjudicator’s statutory task of independently assessing value’.

What this means for you

It is now clear mediation is not a ‘method of resolving disputes’ for the purposes of s 10A(3)(d) of the SOP Act.

In contracts and subcontracts with a value of more than $5 million, disputed variations are not quarantined from adjudication if the dispute resolution procedure does not achieve ‘the certainty and finality of a binding amount’.

A process requiring mediation and which then leaves the parties to pursue their rights at law (i.e. litigation) does not achieve this.

The Court of Appeal did not affirm Vickery J’s comments that arbitration and binding expert determination do achieve ‘certainty and finality’. However, so long as either process is provided for in mandatory and certain terms, it seems from this decision that that will be enough to keep disputed variations in high value contracts out of the grasp of the adjudicator.