Section 11(1)(b)(iv) the Security of Payment
legislation in Victoria provides that the value of construction
work "if any of the work is defective" is to
take account of "the estimated cost of rectifying the
defect". However, that provision only applies where the
construction contract contains no terms dealing with the valuation
of work: Maxstra Constructions Pty Ltd v Joseph Gilbert &
Ors  VSC 243 .
In the Maxstra Constructions case the construction
contract required progress claims to be based on the tender
breakdown and expressed in percentages against each component and
gave the respondent (the head contractor) the right to withhold
retention moneys to the extent that the breaches of the claimant
(the subcontractor) exposed the head contractor to claims for
damages or liquidated damages and gave the head contractor the
right to reduce a progress claim to the extent it was not satisfied
as to the value of the work.
Vickery J held that those provisions of the subcontract did not
amount to "a contractual mechanism which was capable of
producing a calculation of the amount due under a progress payment
or a valuation of construction work carried out under the relevant
construction contract. At best it provided for the broad parameters
within which such a calculation or valuation might be
conducted...". Therefore, in Maxstra Constructions
section 11(1)(b)(iv) had application and the court went on to
consider the possible conflict between that section and section
Deductions for defective work and "excluded amounts"
Section 10B(2)(c) says that under the Victorian Security of
Payment legislation "any amount claimed for damages
for breach of the construction contract" is an
"excluded amount" which cannot be claimed in a
Security of Payment claim. This issue was raised because
the cost of rectifying a defect could be characterised as a claim
for damages for breach of contract.
In Maxstra Constructions, Vickery J held that section
10B(2)(c) where it refers to claims for damages being excluded
amounts did not include the estimated cost of rectifying defects
where section 11(1)(b)(iv) applies:
"damages" under s.10B(2)(c) are quite rightly treated as
separate "excluded amounts", and are to be disregarded in
calculating the amount of a progress payment. The forensic enquiry
involved in assessing damages, and the potentially wide scope of
any such claim is avoided, thereby reinforcing the limited ambit of
the adjudication process contemplated by the Act and its objective
of expedition. On the other hand, the enquiry to be conducted under
s.11(1)(b)(iv) of the Act, properly confined as it is, as I found
it to be, would not be likely to defeat the objectives of the
Clear rights of set-off, including for defective work, should
be included in contracts
If section 11(1)(b)(iv) does not apply (because the construction
contract contains terms dealing with the valuation of work) it is
important from a respondent's point of view that there is an
express obligation on the person carrying out the valuation of the
work under the contract to allow the estimated cost of rectifying
the defect if any of the work is defective.
Also, from a respondent's point of view, it is important
that the contract extends to the respondent an express right of
set-off to be able to deduct from any money due to the claimant,
other amounts claimed by the respondent against the claimant.
In that regard, an earlier decision of the Supreme Court of NSW
in Watpac Constructions v Austin Corp  NSW SC 168
needs to be remembered and in particular McDougall J's
observations that the inclusion of an extremely broad right of set
off might fall foul of the no contracting out provisions in the
legislation and could be declared void. In Watpac
Constructions because it was at least arguable that the
set-off clause included in the contract was "constrained
by both express and implied considerations of
reasonableness", McDougall J suggested the set-off clause
would not be declared void under the no contracting out
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