Legal Insights

Seabay’s back: Liquidated damages excluded under Victorian SOP Act

By Ben McLeod

• 07 October 2021 • 7 min read

The recent Victorian Supreme Court decision of Goldwind Australia Pty Ltd v Ale Heavylift (Australia) Pty Ltd (Goldwind)[1] has provided much-needed clarity on whether liquidated damages (LDs) deducted by a principal for late completion of a project are an ‘excluded amount’ under the Building and Construction Industry Security of Payment Act 2002 (Vic) (Act).

Under section 10B of the Act, there are certain types of claims called ‘excluded amounts’, which may not be taken into account when calculating the progress payment to which a person is entitled. These include amounts relating to:

  • a claim for compensation due to the happening of an event, including time-related costs; and
  • damages for breach of contract.

The ‘excluded amounts’ regime is peculiar to the Victorian legislation.

Cases prior to Goldwind

In the 2011 case of Seabay Properties Pty Ltd v Galvin Constructions (Seabay)[2], the Supreme Court found that:

  • the concept of ‘excluded amounts’ extends to amounts claimed by a respondent in a payment schedule; and
  • claims for LDs are ‘excluded amounts’, such that an adjudicator cannot have regard to a respondent’s offsetting claim for LDs when valuing a payment claim.

Seabay was a controversial decision and often led to the perverse outcome of contractors:

  • running late on a project due to delays of their own making;
  • being liable for liquidated damages for late completion; and
  • seeking to avoid their liquidated damages liability by recovering 100% of the Contract Sum through a claim under the Act, on the basis that LDs must be ignored by the Adjudicator.

However, two cases in 2018 and 2020 appeared to limit the application of Seabay.

  • First, in Shape Australia Pty Ltd v The Nuance Group (Australia) Pty Ltd (Shape)[3], Justice Digby found that a contractor’s claim for the recovery of LDs levied in a previous payment cycle was also an ‘excluded amount’. You can read our eAlert on Shape in full here.
  • Second, in VCON v Oliver Hume & Anor[4], Justice Stynes endorsed Justice Digby’s observations in Shape. VCON related to a claim by the contractor for the return of bank guarantee proceeds cashed on account of the contractor’s alleged liability for LDs under the relevant construction contract. Justice Stynes held that:
"any attempt by a party to recoup liquidated damages levied in a previous accounting period is a claim for an excluded amount that must not be taken into account in calculating the amount of a progress payment. This principle derives from the decision of Digby J in Shape.”

Until Goldwind, the position therefore seemed to be that both the levying of LDs by a respondent in a payment schedule, and a subsequent claim by the contractor to recoup LDs already levied, are ‘excluded amounts’.

Facts

In early 2020, Goldwind engaged Ale Heavylift (Ale) under a subcontract to use two specialised cranes to erect wind turbines in connection with the Stockyard Hill Wind Farm project near Ballarat, Victoria.

The subcontract provided that Goldwind would pay Ale on a monthly basis according to Ale’s rate of progress, which was subject to a productivity adjustment formula.

In May 2020, Goldwind increased Ale’s scope by adding more turbines for installation in the northern part of the site. The two cranes were at that stage situated in the southern part of the site – around 40km away. One of the cranes took 18 days to move from the south to the north, and the other took 40 days.

There followed a number of payment cycles (under the Act) under which Ale made claims for work performed and Goldwind applied a ‘delay deduction’, on the basis that the 40-day relocation for one of the cranes was excessive, and an allowance of 25 days was more ‘reasonable’.

Ale then issued Payment Claim 13, ignoring the ‘delay deduction’ and claiming $552,450.92 for work done which had not been paid for by Goldwind. Goldwind again applied the ‘delay deduction’ in the payment schedule and Ale referred its claim to adjudication.

The Adjudicator determined that Seabay applied, that Goldwind’s ‘delay deduction’ was an excluded amount, and that Ale was entitled to the amount claimed in Payment Claim 13. Goldwind applied to the Supreme Court for judicial review, relying on the principles in Shape.

The Court’s findings

The key question for the Court was whether Ale’s claim was for work done under the subcontract, or was a claim to recoup the ‘delay deduction’. Ale submitted that it was the former, whereas Goldwind said that it was the latter – and the claim was therefore an ‘excluded amount’ in line with Shape.

Justice Stynes determined that, properly understood, Ale’s claim was a claim for work done and the Adjudicator’s determination was valid. She rejected the submission that if a claimant fails to immediately adjudicate a deduction in a payment schedule, this somehow changes the nature of the claim to being a claim to ‘recoup’ previously unchallenged deductions. Such an interpretation was not supported by any provision of the Act, and was contrary to its primary purpose of ensuring that parties who carry out construction work are entitled to recover progress payments.

In making these findings, Justice Stynes said that Justice Digby’s observations in Shape did not constitute binding precedent and she was not bound to follow them. No mention was made of VCON in the judgment, and it is unclear whether it was raised by the parties in submissions.

In passing, Justice Stynes also indicated that it might have been open to Ale to argue that the ‘delay deduction’ was unable to be taken into account by the Adjudicator because this type of deduction was not to ‘be accounted for in the valuation of construction work.’

Implications

This is a significant decision, and a positive one for claimants. It marks a return by the Court to the principles established in Seabay.

After Shape and VCON, the general consensus in the industry was that unless an LDs deduction was immediately taken to adjudication, a subsequent claim for the return of those monies could be characterised as an attempt to ‘claw back’ or ‘recoup’ LDs – and be classified as an excluded amount.

While VCON was not dealt with in the judgment, Goldwind appears to remove the risk to claimants in not immediately referring a disputed LDs deduction to adjudication, and having its claims characterised as a ‘claw back’ or ‘recouping’ of LDs previously levied. VCON is likely distinguishable as a case regarding bank guarantee proceeds, whereas Goldwind dealt with a claim for payment for work performed.

Principals should therefore be aware that an LDs set off in a payment schedule is unlikely to be successful where it is challenged by a claimant under the Act – even if the challenge is not made immediately – and should consider whether other contractual protections might be implemented for late completion by the contractor (for example, additional performance security).

Finally, while Justice Stynes’ comments regarding the ‘valuation of construction work’ were not developed in any detail, Her Honour seems to be indicating that a respondent’s ability to apply deductions in a payment schedule is, in fact, quite limited. If the deduction does not relate squarely to valuing of construction work, it cannot be considered by an Adjudicator. This might mean that deductions for items such as backcharges in reliance on the contractual set off regime are not permissible.

[1] [2021] VSC 625

[2] [2011] VSC 183

[3] [2018] VSC 808

[4] [2020] VSC 767

If would like to know more about your rights under the Act, please contact a member of our team.

Our Construction and Projects team routinely advises on matters relating to the Victorian SOP Act for both claimants and respondents. We were recently successful in recovering for one of our key clients what is understood to be one of the highest adjudicated amounts in Victorian security of payment history.

By Ben McLeod

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