Security of Payment: the position gets more nuanced
In the first of our series of articles on Security of Payment we look at the The Supreme Court of Victoria's decision in Shape Australia Pty Ltd v The Nuance Group (Australia) Pty Ltd , handed down in the last sitting date of 2018.
The case has not been reported widely, but deals with two key issues regarding parties’ rights under the Building and Construction Industry Security of Payment Act 2002 (Vic) (Act):
- First, whether a ‘reference date’ arises to permit a fresh payment claim to be delivered in circumstances where no further work has been carried out since the previous ‘reference date’.
- Second, whether a claim for recovery of liquidated damages levied by a respondent is an ‘excluded amount’ for the purposes of the Act.
Before discussing the case, here is a brief refresher on some key concepts in the Act.
- Reference Dates: a claimant may only deliver a payment claim on and from a ‘reference date’. ‘Reference Dates’ are either the date(s) determined under the contract, or if the contract is silent, they occur monthly. A Claimant cannot serve more than one payment claim per 'reference date'.
- Service of payment claims: a payment claim must be served within the later of the period determined under the Contract, or three months after the relevant ‘reference date’.
- Excluded amounts: There are certain types of claims that are called ‘excluded amounts’ and may not be taken into account when calculating a parties’ rights under the Act. This includes amounts relating to:
- a claim for compensation due to the happening of an event, including for time-related costs,
- damages for breach of contract.
These ‘excluded amounts’ are peculiar to the Victorian legislation.
In July 2016, Nuance entered into a contract with Shape, under which Shape was to demolish, refurbish and fit out an existing retail duty-free space at Melbourne Airport (Contract). The contract sum was $13.8 million (excluding GST).
On 10 July 2018, Shape issued payment claim 14 in the amount of $1,285,579.62, which included claims for construction work that had already been claimed in payment claim 13. Nuance issued a payment schedule and certified $nil as due and payable. Shape then referred payment claim 14 to adjudication.
The adjudicator determined that he did not have jurisdiction to make a determination because:
- payment claim 14 was invalid for want of a reference date, as no new work had been carried out since February 2018; and
- the entirety of the amount claimed was an excluded amount’, as it was a claim to recoup liquidated damages (LDs) that had been levied by Nuance against Shape.
Shape appealed the determination.
The Court’s findings
The Court agreed with the findings of the adjudicator, and dismissed Shape’s application for judicial review. The following issues were considered.
Does a new 'reference date' arise?
Shape was entitled to deliver payment claims on the 28th day of each month. However, the substantive provision of the Contract dealing with payment claims was an unamended clause 42.1 of AS2124, and said:
Claims for payment shall include the value of work carried out by the Contractor in the performance of the Contract to that time together with all amounts then due to the Contractor arising out of or in connection with the Contract…
His Honour Justice Digby found that:
- the wording of cl 42.1 gives rise to a threshold requirement that the claimant must have carried out work under the Contract ‘to that time’ so as to trigger a 'reference date';
- no new work had been carried out by Shape since February 2018;
- the relevant ‘reference date’ was therefore 28 February 2018;
- Shape had already delivered a payment claim (i.e. its payment claim no. 13) in respect of the 28 February 2018 reference date; and
- therefore, payment claim 14 was invalid for the purposes of the Act because it was either:
- a second payment claim in respect of the 28 February reference date; or
- served more than three months after the 28 February 2018 reference date.
Is a claim for recovery of LDs an excluded amount?
Previously, in the case of Seabay Properties Pty Ltd v Galvin Constructions, the Court found:
- 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 offsetting claims for LDs when valuing a payment claim.
However, in Shape, Justice Digby found Shape’s claim for the recovery of LDs was also an ‘excluded amount’, as it was a claim for compensation due to the happening of an event, being the asserted entitlement by Nuance to LDs.
In a contract where the right to make a progress claim is triggered by the carrying out of work up to the time for making progress claims, no ‘reference date’ (for the purposes of claiming under the Act) is triggered unless new work has been done since the last reference date. Many construction contracts based on standard forms use the words ‘to that time’, or a similar formulation, in their payment provisions. So, the principle in Shape will be of broad application in Victoria. Unless new work has been carried out since the last reference date, a claim for payment under a construction contract in Victoria will not be a valid claim under the Act.
The practical implications are broad. Payment claims delivered at the end of a project (such as during or at the end of the defects liability period) may now be invalid under the Act where no further compensable work was carried out since the last payment claim was delivered. While a contractor will still have its contractual right to deliver a final payment claim, and seek the return of any remaining security, it may not be able to seek adjudication under the Act if the final certificate is disputed.
Since Seabay, practitioners have been operating on the assumption that any claim by a contractor to recover LDs previously levied against it would always succeed in an adjudication, because a respondent’s offsetting claim for LDs was an excluded amount which an adjudicator had to ignore. However, that assumption is no longer correct in light of Shape.
The position now seems 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.
It follows that where:
- a respondent levies LDs by applying a set-off in a payment schedule; and
- the claimant fails to apply for adjudication immediately to ‘undo’ that set-off;
then an adjudicator who is asked by a claimant to undo a respondent’s set-off for LDs in an adjudication over a later payment claim should refuse to do so.
While the effect of this decision is still being considered, it seems to us that Shape is likely to lead to an increase in adjudications in Victoria. Claimants may now need to adjudicate as soon as a respondent levies LDs by way of set-off in a payment schedule, because delay could mean they lose the right to recover the LDs via adjudication.
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