The concepts of set off and back charges are fairly common in
construction and engineering circles, however, the correct
application of these types of provisions can often be
In the recent case of PPK Willoughby v Eighty Eight
Construction, the Supreme Court considered (amongst other
things) whether an adjudicator had failed to fulfil his statutory
obligations in determining that there was no retrospective right to
set off for the cost of rectifying defects.
PPK (as Principal) and Eighty Eight Construction (as Contractor)
entered into a "Construction Agreement" for the
construction of luxury homes on Sydney's lower north shore.
As part of the payment process the Contractor would email a
spread sheet to the Superintendent every month containing a claim
for interim payment. Shortly thereafter, the Superintendent would
meet on site with the financier's quantity surveyor and the
Contractor to walk through the site and determine what work had
been completed that month.
After undertaking a site inspection, the Superintendent would
then issue a certificate of payment identifying what the Principal
should pay to the Contractor. Sometime shortly after issuing the
certificate, the Contractor would then submit a tax invoice stating
the amount certified as being payable. Not surprisingly, the
Superintendent would then approve the tax invoices for payment.
This process was working reasonably well until unlucky payment
claim #13 landed on the Principal's desk.
In payment claim #13, the Contractor had claimed payment for an
agreed amount of approx. $450,000. The payment claim was made under
the Building and Construction Industry Security of Payment Act
1999 and was approved for payment by the Superintendent. The
Superintendent approved payment in full knowledge of minor and
major defects in the works. Somewhat unsurprisingly, the Principal
refused to pay the claim, claiming that the work was 'riddled
with defects'. The Contractor sought to have the matter
The adjudicator concluded that the defects report provided for
the purposes of the adjudication post-dated the agreed payment
claim and that there should be no set off for the cost of
rectification of defects, as the contract did not permit "the
retrospective application of deductions". In light of this,
the adjudicator concluded that the Contractor was entitled to
payment of $450,000. The dispute headed to court.
The Principal claimed that the adjudicator had merely adopted
the Superintendent's valuation and had not turned his mind to
the statutory powers given to him. That is, the adjudicator had not
himself determined the amount of the progress payment (if any) to
be paid to the Contractor and merely adopted the
Superintendent's valuation of the amount due.
The Principal also submitted that the adjudicator knew there
were substantial defects in the work done by the Contractor but had
made no allowance for this in his determination. The Principal then
alleged it had been deprived of its entitlement to have the cost of
defect rectification set off against any amount otherwise due.
The Contractor submitted that the adjudicator had followed due
process. The Contractor further submitted that the real dispute, as
identified by the adjudicator, wasn't the valuation of the work
but, rather, the amount (if any) which should be allowed as a set
off, which the adjudicator had determined as nil.
The court stated that whilst the adjudicator may have been right
or he may have been wrong in his interpretation of the set off
provision, he turned his mind to the relevant statutory and
contractual provisions, to the relevant reasons for non-payment and
to the submissions and material in support of those reasons and
rejected the Principal's set off argument.
Having dealt with the real issue in dispute, the adjudicator
sought to complete the statutory functions of determining an
adjudicated amount. The Principal's challenge to the
adjudicator's determination therefore failed and the Principal
was obliged to pay the Contractor the whole of payment claim
If a party seeks to claim set off then the amounts to be set off
should be included in any certificate of payment or payment
schedule. In addition, if parties seek to claim retrospective
application of deductions then this should be reflected in the
Many retail leases include a covenant to trade, requiring the tenant to open the premises for trade during certain hours.
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