Lessons from recent Victorian security of payment skirmishes

What you need to know

• The Victorian Supreme Court and Court of Appeal recently determined two cases pursuant to the Building and Construction Industry Security of Payment Act 2002 (Vic) (the Act), each arising from a principal's failure to issue a payment schedule within the prescribed period after receipt of a contractor's payment claim.
• In assessing whether a payment claim is valid, the courts consider the claim document on its face, and will not have regard to extrinsic evidence of surrounding circumstances, even if doing so might demonstrate that items of work are inadequately described or an "excluded amount".
• An "excluded amount" in a payment claim does not invalidate the remainder of the claim, as it is severable.
• An adjudicator is entitled to infer that a principal can't dispute a payment claim if a payment schedule wasn't issued.
• These cases emphasise the primacy of the payment schedule and adjudication as a way of resolving payment disputes, and demonstrate the courts' reluctance to entertain evidence-driven and unduly technical proceedings under the Act.

What you need to do

• If your business may make or receive a security of payment claim, ensure you are familiar with the statutory regime and the consequences of failing to comply with it, to avoid unexpected outcomes and costly legal proceedings.

Security of payment laws were conceived to facilitate timely payment for construction work undertaken by contractors or sub-contractors down the contractual chain by promoting a 'pay now, argue later' approach.

While this may appear simple in principle, the practical application of this scheme is less than straightforward, and not assisted by jurisdictional variations and complexities across Australia. Two recent cases determined by the Victorian Supreme Court and its Court of Appeal, however, suggest a renewed focus by Victorian courts on achieving the scheme's underlying purpose.

Both cases demonstrate how the courts help preserve and maintain a contractor's cash flow through upholding strict procedural requirements for payment disputes. Principals and contractors alike should therefore have regard to the court's purposive approach in security of payment disputes when deciding how to initiate or respond to claims under the Act. Specific issues determined in these two cases will assist principals and contractors when navigating the Victorian security of payment regime.

Façade Designs International Pty Ltd v Yuanda Vic Pty Ltd [2020] VSC 570

This case demonstrates that although payment claims are merely 'claims' initially, it will be difficult for a principal to avoid paying a claim in full should it fail to issue a responding payment schedule.

In this case, Façade Designs International Pty Ltd claimed payment of almost $3.5 million from Yuanda Vic Pty Ltd for September 2019. Despite only paying about a quarter of the amount claimed for that month, Yuanda did not provide a payment schedule to dispute the rest within 10 business days of receiving the payment claim (or at all). As such, Façade was entitled to apply to the Court for summary judgment to recover the unpaid portion of the claim.

Yuanda argued before the Court that the payment claim was invalid on the basis that it didn't adequately identify the construction work to which it related. Further, even if the claim sufficiently particularised the relevant construction work, Yuanda submitted that the Court was precluded from entering judgment, as it contained some excluded amounts that are unable to be claimed under the Act. Yuanda argued for a narrow reading of this section in support of its view that it was not open to the Court to make a judgment for part of the payment claim.

Identification of construction work

In assessing whether a payment claim sufficiently identifies the work to which it relates, the Court made clear that it will consider extrinsic evidence only to the extent that it is expressly or impliedly referred to within the claim, or is relevant to the context of the construction contract under which the claim was issued. To this end, payment claims should be construed objectively and evaluated on their face.

The Court was particularly critical of each party's attempt to adduce significant extrinsic evidence as background, and warned parties against using the context of an agreement as a 'Trojan horse' to admit evidence of surrounding circumstances. It was the Court's view that the use of such material here led to a protracted and costly proceeding which was contrary to the purpose of the Act, and which should be discouraged.

While the Court's approach allows payment claims with insufficiently particularised or error-affected items to be upheld, the Court considered that these inadequacies should be dealt with as part of the statutory adjudication process, initiated by the principal issuing a payment schedule. This is because the adjudicator is required to determine the appropriate amount to be paid having regard to the claim and the items disputed in the payment schedule.

Overall, notwithstanding possible deficiencies in some of the items claimed by Façade, the Court held that a reasonable building practitioner would have understood that the claim reasonably attempted to identify the work it related to, particularly given it attached and otherwise referred to supporting documentation. As such, the payment claim adequately identified the relevant work and was valid.

Inclusion of excluded amounts

For similar reasons, the Court also held that an inquiry into whether a payment claim includes an "excluded amount" for the purposes of a summary judgment application should be limited to assessing the face of the claim and does not warrant a full investigation of its facts and circumstances.

Applying this approach, the Court found that one of Façade's claimed items (relating to interest) was an excluded amount within the meaning of the Act. The Court, however, determined that the excluded amount could be severed without affecting the validity of the remainder of the payment claim for reasons that any other construction would frustrate the Act's central purpose of facilitating prompt payment for construction work and would be inconsistent with the adjudicator's powers to exclude such amounts when determining the quantum payable.

Of note, Yuanda has sought leave to appeal the Court's finding that examining the face of a payment claim, together with any supporting documentation, is sufficient to determine whether any part of a claim is an excluded amount. The proposed appeal does not otherwise challenge the Court's approach to assessing the validity or adequacy of a payment claim. 

1155 Nepean Highway Pty Ltd v Promax Buildings Pty Ltd [2020] VSCA 253

This case demonstrates how failure to deliver a payment schedule can be relied on to argue that the recipient is unable to contest the claimed amount.

In this case, the principal sought leave to appeal the trial judge's decision to uphold the adjudicator's determination that the principal pay the full amount of a payment claim of approximately $2 million.

Promax Buildings Pty Ltd had sought adjudication of the payment claim following the principal's failure to issue a payment schedule. Before making an adjudication application, Promax had to give the principal notice of its intention to make the application and a further two business days to provide a payment schedule, which the principal again failed to do. The principal's failure to provide Promax with a payment schedule disputing claimed items meant that it was not entitled to lodge an adjudication response with the adjudicator.

The adjudicator pointed out in its written determination that there was no material from the principal to dispute the amount claimed for each item. This purported "formulaic approach" was key to the principal's argument that the adjudicator had erred. To this end, the principal asserted that the adjudicator was not entitled to infer that failure to adduce contradictory material in the adjudication meant that the principal could not credibly challenge the value of the claimed amount.

Although it was unclear to the Court whether the absence of a payment schedule led to the adjudicator's ultimate decision, the Court found that it would have been open for the adjudicator to draw an inference that the principal was not able to dispute the payment claim based on the principal's failure to issue a payment schedule. In the Court's view, it was a "matter of common sense" that a recipient of a payment claim who does not respond to the claim may not have a basis on which to contest it. Accordingly, any decision an adjudicator makes on this inference will stand, even if it is later established that the recipient had a satisfactory explanation about the failure, which would have been forthcoming if asked. Significantly, this inference can only be drawn from a principal's failure to provide a payment schedule, and not its failure to submit an adjudication response in circumstances where it is precluded from doing so under the Act. Given the facts before the Court, it was not necessary to consider the effect of a principal's silence during the adjudication process if it was entitled to, but did not, participate in the adjudication. The principal also argued that the adjudicator adopted the submissions of Promax without independent assessment or regard to all relevant materials, and therefore that his determination should be quashed. The Court, however, considered that the adjudicator's brief conclusions were consistent with the 'rough and ready' approach promoted by the Act, which encourages adjudication applications to be determined as expeditiously as possible. Similarly, the Court held that the Act did not require adjudicators to consider all documents that might make up a construction contract. Rather, it is appropriate for an adjudicator to consider the provisions of a contract without relying upon documents referred to therein, unless those documents are provided by the parties or required by the adjudicator.

Where these cases leave us

The Victorian courts' recent approach continues a theme seen in security of payment cases across Australian jurisdictions of encouraging resolution of claims in an expedient and cost-effective manner.

For principals who are likely to be involved in payment disputes, now is the time to consider how to meaningfully engage with the payment claim process to avoid liability for the entirety of a claimed amount. To this end, serving a payment schedule is critical in disputing claimed items whilst preserving the ability to participate fully in any adjudication process.

For contractors seeking to initiate payment disputes, ensure that payment claims are adequate on their face, without having to refer to extrinsic information that is not incorporated by reference within the claim. Doing so will allow any future court proceedings to progress without substantial supporting evidence in accordance with the courts' favoured construction of the Act.

Authors: James Clarke, Partner; Adam Firth, Partner; and Amelia Barrow, Lawyer.