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Focus: The application of the Victorian security of payments legislation

1 September 2010

In brief: The Victorian Supreme Court recently clarified aspects of the Victorian security payments regime when it severed parts of a payment claim that properly identified construction work claimed under the legislation from those that did not, and also found that, in some circumstances, payment claims could be served after termination. Partner Nick Rudge (view CV) , Lawyer Nicholas Gallina and Law Graduate Daniel Elliott review the decision.

How does it affect you?

  • When preparing payment claims, contractors should identify construction work in sufficient detail to allow reasonable principals to 'understand the basis of the claim and [to] provide a considered response'.
  • Principals should not assume that payment claims that do not properly identify all the construction work for which payment is claimed are entirely invalid. This is because under the Building and Construction Industry Security of Payments Act 2002 (Vic) as it stood before the 30 March 2007 amendments (the old Act), and very likely under the current legislation (the new Act), those parts of a payment claim that properly identify construction work may be severed from those parts that do not.
  • Contractors should carefully consider the timing of payment claims made after termination. A payment claim under the old Act may be served after termination if the contractor had accrued a contractual right to a progress payment. The court also indicated that under the new Act, where a construction contract has been terminated, a final payment claim may be served within three months of the cessation of the construction work.

Facts

In Gantley Pty Ltd v Phoenix International Group Pty Ltd1, the defendant builder served three payment claims after the relevant construction contracts had been terminated. The payment claims, which included claims for variations, retention money and prolongation costs, were subject to the old Act because the contracts were entered into before 30 March 2007. The court decided the case under the old Act but also made comments in relation to the new Act.

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The decision

Severance where payment claims do not properly identify all construction work

Requirement to identify construction work

The court stated that payment claims must identify construction work in sufficient detail to allow a reasonable principal to 'understand the basis of the claim and provide a considered response'. The test 'is not an overly exacting exercise' and it is appropriate to 'take into account the background knowledge of the parties'.2

The court found that certain variation claims, which included 'a short description (occupying a few lines) describing the work', and a retention money claim described as the 'value of bank guarantee to be returned ($100,000 plus interest capitalised from the date of PC)', adequately identified the construction work.3

The court stated that to properly identify prolongation claims, it is necessary to state the manner in which the claims were calculated.4 Some of the prolongation claims met this requirement because the events that gave rise to them were described in five- and six-page reports.5 However, another prolongation claim, described as 'Liquidated Damages caused by the Owner...' with respect to 'Mr Zayler's oral instructions and/or written instructions on/or about the 15/01/2007 – 19/02/2009' did not meet this requirement.6

The court noted that the forms of payment claim produced by two trade organisations may help contractors avoid problems with insufficiently described construction work.7

Severance of payment claims

Applying the common law doctrine of severance, the court severed the valid parts of the payment claims (the parts that properly identified the construction work) from the invalid parts (the parts that failed to properly identify the construction work). The court indicated that severance can occur if 'no material change' to the valid parts of payment claims is introduced.8

The case indicates that severance under the new Act may also be possible because the requirement to identify construction work is 'not materially different' under the old and new legislation.9

Payment claims served after termination

The court indicated that under the old Act payment claims could be served after termination if, immediately before termination, a contractor had accrued a contractual entitlement to a progress payment.10 The court found that the builder had such an entitlement and that its payment claims were not invalid merely because they were served after termination.11

In obiter, the court confirmed that under the new Act, where a construction contract has been terminated, a final payment claim may be served within three months of the cessation of construction work under the contract.12

Footnotes
  1. [2010] VSC 106.
  2. Gantley at [51].
  3. Gantley at [55], [75], [78] and [86].
  4. Gantley at [71]. It is also necessary to show the contractual basis of entitlement to prolongation costs, (Gantley at [70]). The court noted that payment claims may include prolongation cost claims 'if the relevant construction contract permits prolongation claims to be claimed as part of a progress claim' (Gantley at [59]).
  5. Gantley at [81] and [89].
  6. Gantley at [58] and [72].
  7. See the form of payment claim produced by the Civil Contractors Federation in Schedule A of the judgment and the form of payment claim produced by the New Zealand Building Subcontractors Federation at Schedule B of the judgment.
  8. Gantley at [107] and [113].
  9. Gantley at [35].
  10. Gantley at [174(b)].
  11. Gantley at [198] - [200].
  12. Gantley at [181] - [184], and [189].

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