KEYWORDS: CLAIMABLE VARIATIONS; SECURITY OF PAYMENT
The Court of Appeal has confirmed that mediation is not a "method of resolving disputes" for the purpose of section 10A(3)(d)(ii) of the Building and Construction Industry Security of Payment Act 2002 (Vic).
Parties wishing to limit variations that can be included in a payment claim should specify arbitration (or potentially binding expert determination) in the dispute resolution clause.
The decision at first instance was the subject of a detailed note in an earlier Construction Law Update. In summary, the dispute resolution clauses in the construction contract between the parties provided for a compulsory meeting between the parties, followed by mandatory mediation. This clause was relevant to the "claimable variations" regime under Victorian security of payment legislation.
At first instance, Vickery J held that additional mandatory steps beyond mediation were needed to satisfy the "method of resolving disputes" requirement in section 10A(3)(d)(ii) of the Building and Construction Industry Security of Payment Act 2002 (Vic). Vickery J held that such a method needed a third party to produce a binding decision. SSC appealed this decision.
Unlike other jurisdictions, claimants in Victoria are restricted in the amount of "claimable variations" that they can include in a payment claim (and adjudication). These claimable variations fall into three categories.
There is no restriction for contracts worth less than $150,000. For contracts worth between $150,000 and $5 million, claimable variations are restricted to 10% of the contract sum.
For contracts worth more than $5 million, no variations can be included at all if the contract provides for a "method of resolving disputes". This means that if there is no method of resolving disputes in the contract all variations can be included in a payment claim under the Act.
The second aspect of the regime highlighted in this decision is the role of the adjudicator in assessing the progress payment. If the contract does not provide a methodology for calculating progress payments, then the Act supplies a default methodology. One of the matters an adjudicator must "have regard to" under the Act is the contract price. When it is in fact the superintendent who sets the contract price by certifying the value of variations, a difficult question arises as to whether the adjudicator is bound by the superintendent's valuation as part of their role to "have regard to" the contract price.
The Court of Appeal (Santamaria, Beach and McLeish JJA) unanimously dismissed the appeal.
In holding that mediation was not a method of resolving disputes in accordance with the Act, the Court relied on the following arguments.
- Mediation is a facilitative process that does not necessarily lead to a binding outcome. It would be inconsistent with the wording of the legislation — which speaks of "resolving", not "addressing", disputes — to find that mediation was a method of resolving disputes.1
- The purpose of the Act is to secure cash flow with an expedited dispute resolution procedure. Any deviation from the mechanism of the Act is justifiable only on the basis that it provides an alternative means of securing cash flow. Mediation, which may not resolve the dispute, does not assist in this respect.2
- On examination of the extraneous material, it is apparent that Parliament intended parties only be taken outside of the operation of the Act when they had contractually specified an alternative basis on which their disputes would be finally resolved, not merely discussed.3
Secondly, the Court of Appeal agreed with the trial judge that an adjudicator must reach their own decision as to the value of the progress payment owed, and will not simply be bound by the superintendent's valuation.
The Court's reasoning was:
- As the contract did not provide a methodology by which the progress payment was to be valued, the adjudicator was to value work in accordance with the default regime in section 11(1)(b) of the Act. One of the factors to be considered was the amount specified by the construction contract.
- While a third party (such as an architect or valuer) may set the contractual price of works:
- such a valuation is not final (and presumably does not in truth set the contract price) while the potential for challenge to the price exists;4 and
- even if such a determination were "final" and did set the contract price, the contract price was simply one factor the adjudicator was to "have regard to" in reaching their view as to valuation. It was not an item to be slavishly followed.5
The Court noted that this conclusion was consistent with the position adopted in New South Wales and Queensland, and expressed agreement with the "thrust" of the decisions in those States.6
While there is some suggestion that binding expert determination will suffice, this decision confirms that parties wishing to limit the claimant's ability to claim variations under the Act should include an arbitration clause.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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