Landmark judgments impacts Building & Construction Industry Security of Payment legislation

The High Court has handed down two decisions concerning security of payments claims made under the relevant Building and Construction Industry Security of Payment Act in NSW and South Australia('SOPA'). This bulletin provides an overview of two recent high court decision and discusses what the outcomes of these mean for the building and construction industry in relation to Security of Payment.

The Security of Payment Act

Under SOPA, any person who undertakes to carry out work under a construction contract is entitled to seek recovery of a progress payment for the work.

The claimant may refer a disputed payment claim to an adjudicator, who determines if the person is entitled to a progress payment, and, if so, the amount.

Case 1: Probuild v Shade Systems

Shade Systems served a payment claim on Probuild. In reply, Probuild asserted that Shade Systems was not entitled to a payment as it owed Probuild a considerably larger sum of money for delay liquidated damages (LDs).

Shade Systems referred the claim to an adjudicator under the NSW SOPA. The adjudicator found that Probuild was not entitled to set off its claim for LDs against the payment claim as the LDs would only be calculated at the date of practical completion or termination of the subcontract, neither of which had occurred. The adjudicator, therefore, determined an amount payable by Probuild.

Probuild's appeal to the Supreme Court of NSW

Probuild sought an order to quash the adjudicator's determination ("certioriari") in the Supreme Court of NSW. The Court quashed the adjudicator’s decision, finding that the adjudicator had made“an error of law on the face of the record”, or a 'non-jurisdictional error'. The Court held the adjudicator had erroneously considered that:

1. No entitlement to LDS arose until PC or termination of the subcontract; and
2. Probuild needed to demonstrate that Shade Systems was at fault for the delay (when the contract placed the onus on Shade Systems to demonstrate an entitlement to an extension of time).

Shade Systems successfully appealed to the NSW Court of Appeal. The Court held that the Supreme Court did not have jurisdiction to quash an adjudicator's determination for a non-jurisdictional error.

High Court upheld Court of Appeal's finding

Probuild took the matter to the High Court. The High Court upheld the Court of Appeal's finding that an adjudicator's determination pursuant to SOPA could not be quashed. The Court considered that if reviews for errors of law could be made, the legislative purpose of the SOPA would be undermined.

In coming to its decision, the High Court elaborated upon the legislative intention of SOPA stating that it is:

1. an interim scheme enacted to 'reform payment behaviour in the construction industry', which ensures a quick resolution of disputes regarding progress payments without detailed consideration of the legal issues; and
2. a 'speedy and effective means of ensuring cash flow to builders from the parties with whom they contract'.

Read the full case here: Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4

Case 2: Maxcon v Vadasz

Maxcon engaged Mr Vadasz under a subcontract. Under the 'retention provisions', Mr Vadasz was required to provide a 'retention sum' as security. Maxcon was to release the sum following the issuing of a certificate of occupancy pursuant to State Planning legislation.

Mr Vadasz served a payment claim on Maxcon under the South Australia SOPA. In response, Maxcon proposed to pay an amount deducting the retention sum and administration fees.

'Pay when paid' provision invalid under SOPA

The parties proceeded to adjudication. The adjudicator found in favour of Mr Vadasz, concluding that the retention provisions were 'pay when paid provisions', which are invalid under SOPA. 'Pay when paid provisions' are defined in section 12 of SOPA to mean a provision of a construction contract where liability or the due date to pay money is contingent upon the operation of another contract. Accordingly, Maxcon was not entitled to deduct the retention sum from its progress payment.

Maxcon sought to set aside the adjudicator's determination in the Supreme Court of South Australia. The Court dismissed Maxcon's application.

Maxcon unsuccessfully appealed to the Full Court of the Supreme Court, which followed the decision of the NSW Court of Appeal in Probuild v Shade Systems.

High Court decision matched the Probuild conclusion

Maxcon appealed to the High Court. The Court heard the appeal alongside Probuild v Shade Systems, and accordingly the same conclusion was reached: the adjudicator's decision could not be quashed by the Supreme Court.

The High Court separately considered whether the retention provisions were 'pay when paid' provisions, namely whether the provisions made the liability to pay the money owing or the due date for payment owing "contingent or dependent on the operation of another contract". Given that the date for payment of the retention sum was contingent upon the issuing of a certificate of occupancy, which, in turn, required completion of a head contract, the Court upheld the adjudicator's determination that the retention provision was a 'pay when paid' provision, and therefore void under SOPA.

Read the full case here: Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5

The key learnings for the building and construction industry

‘Cash flow is the lifeblood of the construction industry’

• The decisions affirm that SOPA is intended to be a means through which the fast, informal, and self-contained resolution of payment disputes can be achieved. A 'rough and ready resolution of disputes' via the application of SOPA does not leave room for an adjudicator to undertake a detailed analysis of legal issues.
• There are now extremely limited opportunities for review of an adjudicator's decision under SOPA by the Courts. A mis-interpretation of the law or a contract by an adjudicator, as a 'non-jurisdictional error', cannot be quashed by the Courts. A party wishing to reverse payments made under SOPA based on alleged non-jurisdictional errors will have to seek redress through the Courts by way of separate court proceedings rather than an application to quash the decision.

'Pay when paid'

• The High Court's determination regarding 'pay when paid' provisions has essentially expanded its application. Contractors must ensure that the instrument upon which a retention provision is contingent does not require completion of another contract, lest it be rendered void under section 12 of SOPA.