In 2006 the Victorian Building and Construction Industry Security of Payment Act 2002 ("Act") was amended with particular implications for construction contracts (as defined in the Act) entered into after 30 March 2007.
The introduction of these amendments led to an expectation among many participants in the Victorian building and construction industry that fewer claims would be made under the Act, particularly in respect of large-scale projects. It was perceived that the amendments would exclude from adjudication the very sorts of claims that contractors would otherwise wish to be the subject of interim independent determination – especially disputed variation claims.
However, a decision of Judge Shelton in the County Court of Victoria in late 2008 sends a reminder that disputed variation claims do not always fall outside the ambit of the Act.
Amendments affecting variation claims
A key amendment to the Act was the introduction of "excluded amounts", being "classes of amounts that must not be taken into account in calculating the amount of a progress payment to which a person is entitled under a construction contract".1
One type of excluded amount is "any amount that relates to a variation of the construction contract that is not a claimable variation".2
Claimable variations are broken into two classes – first and second class variations – for which the Act sets out a series of requirements to be met before a variation can be characterised as a claimable variation.3
This aspect of Victoria's security of payment legislation is unique compared to similar legislation in other states.
AC Hall Airconditioning Pty Ltd v Schiavello (Vic) Pty Ltd
In AC Hall Airconditioning Pty Ltd v Schiavello (Vic) Pty Ltd  VCC (26 November 2008), the claimant issued proceedings in the County Court of Victoria seeking summary judgment in circumstances where the respondent had not provided a payment schedule. The respondent resisted the award of summary judgment on numerous grounds, one of which was that the relevant payment claim included excluded amounts in the form of non-claimable variations. The claimant argued that the disputed variations were second class variations and were therefore claimable.
The requirements of a second class variation are:
- the provision of work or supply of goods and services under the contract
- there being a request or direction for that work, goods or services by or on behalf of the person for whom the work was being carried out or the goods and services supplied
- failure by the parties to the construction contract to agree on one or more elements of the variation (specific details are set out in the Act).
Further, a negative pre-condition must also be satisfied: the consideration under the construction contract must be $5,000,000 or less (and in some circumstances $150,000 or less) or, if the consideration exceeds $5,000,000/$150,000, then the contract must not provide "a method of resolving disputes under the contract".
In this case, there were a number of disputed variations for which all of the requirements of a second class variation were met and the only issue remaining for determination was whether the negative pre-condition was satisfied.
The consideration under the construction contract exceeded the allowable amount, namely $150,000. Accordingly, the relevant issue before Judge Shelton was whether the contract in question provided a "method of resolving disputes under the contract".
If it did not, then the negative pre-condition would be satisfied and the disputed variations would be second class variations and claimable under the Act. If it did, then the negative pre-condition would not have been satisfied, and the disputed variations would have been non-claimable variations and therefore excluded amounts under the Act.
The contract in question contained a dispute resolution clause. However, Judge Shelton found that the dispute resolution provision did nothing more than re-state the parties' existing inherent rights to have the dispute litigated. What Judge Shelton determined the contract required in order to provide a complying method of resolving disputes was for the contract to provide for "a binding dispute mechanism separate from the Court system."4
On the facts before him, Judge Shelton determined that the contract did not provide any such method and accordingly the disputed variations for which the other second-class requirements had been satisfied were determined to be claimable second class variations.
Applying this reasoning, the contract would perhaps have needed to include an expert determination provision or alternatively be an arbitration agreement in order to block the disputed variations in question from falling within the definition of second class variations. A non-binding mediation or executive conference process seemingly would not be sufficient in that regard.
Wording of the Act
The wording of the Act is regrettably ambiguous on this issue (among others) and the second reading speech does not provide determinative assistance. The relevant section of the amending legislation's second reading speech provides:
"Disputed variations will be excluded where the contract provides a mechanism for determining whether there is an entitlement to be paid for a variation and for determining the quantum and due date for such payment."
The use of the word "determining", in conjunction with the phrase "resolving disputes" used in the Act, lends some support to Judge Shelton's finding. As does the fact that the words used in the Act would arguably be redundant if it had been intended that a dispute resolution clause that resulted in a judge having the final say was sufficient to satisfy the clause.
Other issues in the case – enforcing summary judgment where some excluded amounts included in the claim
In his decision Judge Shelton was also required to consider the operation of section 16(4)(a)(ii) of the Act, and the circumstances when a claimant can obtain summary judgment following a failure by the respondent to issue a payment schedule within the time allowed by the Act.
That section precludes a claimant from obtaining summary judgment unless the court is satisfied that the claimed amount does not include any excluded amount.
The respondent argued that no order for summary judgment could be given at all as the claimed amount included some excluded amounts separate from and in addition to the disputed second class variations.
Judge Shelton refused to disallow the award of summary judgment on this basis, instead applying the Act such that summary judgment could be obtained except in relation to the excluded amounts.
It remains to be seen whether a higher court agrees with Judge Shelton's views. However, on the assumption that Judge Shelton's reasoning is accepted (and the wording of the Act and its second reading speech is sufficiently ambiguous to support his reasoning – especially in relation to second class variations) then many contractors operating under the Victorian security of payment legislation might be able to seek adjudication of disputed variations that they had assumed were otherwise excluded from that process under the Act.
Contractors would therefore be well-advised to closely review the relevant factual circumstances in respect of each disputed variation claim including the contractual terms dealing with dispute resolution, when considering their recovery options.
1 Section 10B(1) of the Act.
2 Section 10B(2)(a) of the Act.
3 Section 10A(2) – first class variations; section 10A(3) – second class variations.
4 Judgment, paragraph 33.
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.