Security of Payment: Primacy of contract and assessment of subsequently identified defects

The Supreme Court has emphasised the primacy of the building contract in granting a right to make a claim for final payment and confirmed the requirement for an adjudicator to be satisfied as to the ‘value’ of the works, notwithstanding that alleged defects that were subsequently identified existed at the time of a previous adjudication.

Vanguard Development Group Pty Ltd v Promax Building Developments Pty Ltd [2018] VSC 386

The case involved an application for judicial review seeking an order in the nature of certiorari to quash an adjudication determination made pursuant to s 23 of the Building and Construction Industry Security of Payment Act 2002 (“Act”).

In 2016, Vanguard (the owner) and Promax (the contractor) entered into a building contract.  The contract contained a number of special conditions which took precedence over the other conditions in the contract.  Relevantly, special condition 22 read:

Reference Date

In [sic] the extent that [the Act] is applicable to this contract, and notwithstanding any other term of this contract and/or its termination, the ‘reference date’ for the purposes of a final claim for payment, pursuant to section 9(2) of the Act, is the date the Contractor last undertook any words on the site. [Emphasis added by her Honour.]

Clause N11 of the contract provided for the making of monthly progress claims and provided for a final claim to be made only in certain circumstances (after all defects liability periods had ended and the works were completed).

On 15 December 2017, Promax issued a progress payment claim (“December Progress Claim”).  This was also the date that Promax last performed work on the site.  Vanguard issued a payment schedule proposing to pay $nil, including on the basis of certain alleged defects.  Promax issued an adjudication application, resulting in a determination in favour of Promax (“First Adjudication”).

On 27 February 2018, Promax served a notice of suspension relying on Vanguard’s failure to pay the December Progress Claim and a notice of termination.  Vanguard denied that Promax had a right to terminate and accepted Promax’s repudiation and terminated the contract.

Vanguard subsequently paid the amount due under the First Adjudication.

Promax then served a ‘claim for final payment’.  Of relevance to this case, that claim included a claim for ‘final payment’ made pursuant to the Act (“Relevant Payment Claim”).  Again, Vanguard issued a payment schedule proposing to pay $nil, citing various defects (many of which were not raised previously). Promax lodged an adjudication application, resulting in a determination in favour of Promax (“Adjudication Determination”).

Vanguard applied for judicial review of the adjudicator’s determination on grounds that the adjudicator:

1. did not have jurisdiction to make the Adjudication Determination given there was no valid reference date; and
2. erred in failing to consider and assess claims relating to alleged defects.

First ground: no jurisdiction

In arriving at the Adjudication Determination, the adjudicator proceeded on the basis that the contract was terminated by Vanguard at common law.

Critically, Vanguard submitted that:

1. special condition 22 does not remove other preconditions for entitlement to a final claim – it simply provides a reference date once other preconditions are met;
2. there was no right to make a final claim under the contract in the case of a common law termination; and
3. Promax’s construction would lead to a commercially absurd result which would allow a builder to ignore the defects liability period and accelerate rights to obtain retention even if it was in the wrong.

Promax submitted, among other things, that:

1. special condition 22 prevails over other conditions and makes it clear that a right to a final payment survives termination and even if it did not apply, a right would arise under the default provisions in s 9(2)(d) of the Act;
2. special condition 22 constituted a clear intention that there was a statutory entitlement to make a final claim on the last day of performance; and
3. even if there was no provision for a final claim in the contract, the Adjudicator was correct to rely on s 9(2)(d)(iii) to supply a reference date.

Justice Kennedy found against the existence of a freestanding (extra) right to a progress payment where the contract already makes provision for a date on which a claim for a progress payment may be made.

Justice Kennedy rejected Promax’s submission that there was some statutory entitlement to make a final payment claim regardless of the contract.  Rather, the ‘freestanding’ reference date under s 9(2)(d) is only applicable for the making of a final payment claim if the contract makes no express provision with respect to the matter.

Her Honour considered that the critical question turned on the construction of special condition 22 and, in particular, the meaning of “final claim for payment” contained therein.

After observing that clause N11 provided for the only circumstances when a “final claim” may be made by a builder, Her Honour held:

1. there was no reason to ignore the contractual mechanisms for the making of a final claim simply because special condition 22 was concerned with identification of a reference date under the Act;
2. the concept of a ‘final claim’ contained within clause N11 is consistent with the ordinary meaning of that concept which involves a ‘final balancing of account’ – this was contrasted to the Relevant Payment Claim which purported to seek final payment although the totality of the works had not yet been completed;
3. while special condition 22 is a priority provision which applies ‘notwithstanding any other terms of this contract and/or its termination’, a reasonable business person would not understand that it provided a completely separate freestanding right to a final claim for payment regardless of the terms of the contract – rather all it did was supply a reference date;
4. this construction avoids the commercial nonsense raised by Vanguard (see above).

On this basis, Kennedy J found that the contractual processes for the making of a final claim had not been initiated or complied with (and could not be, given the early termination).  Therefore, the Relevant Payment Claim was not a ‘final claim for payment’ under clause N11 and there was no reference date provided pursuant to special condition 22.

The absence of a reference date, being a precondition to making a valid payment claim, meant that the adjudicator made a jurisdictional error.

Second ground: failure to consider defects

The adjudicator found that:

1. it was not open to Vanguard to raise alleged defects that existed at the time of the previous adjudication but had only subsequently been identified; and
2. issue estoppel and s 23(4) of the Act prevented Vanguard from re-arguing the value of the defective work.

Vanguard submitted, among other things, that:

1. the fact that the passage of time had enabled identification of additional defects did not absolve the adjudicator of his statutory obligation under s 23(2) of the Act and to assess the value of the work;
2. section 23(4) did not prevent the adjudicator giving the work a different value, but that in the Adjudication Determination there was no assessment at all of the additional defects; and
3. finally, even if s 23(4) was engaged, there was a failure to engage with the question posed by the provision.

Promax submitted that:

1. the adjudicator ultimately did decide that the value of the works had not changed since the earlier determination (on the basis that he did not accept Vanguard was not aware of the defects at the time and that as no further work was carried out since 15 December 2017, no new defects could have arisen);
2. the relevant question was whether the adjudicator was satisfied that there had been a change in value, rather than an engagement in a revaluation; and
3. the Court should find that the adjudicator had rejected the existence of the defects.

Justice Kennedy did not accept Promax’s submission that the adjudicator decided that the value of the works had not changed since the earlier determination. Rather, the essence of the Adjudication Determination was that the claim could not be assessed at all in circumstances where, though the defects may have existed, they had only been subsequently identified.

Justice Kennedy concluded that, by taking this approach, the adjudicator failed to address the correct question.  Even if s 23(4) applied, the adjudicator was required to ask himself whether he was satisfied that the ‘value’ of the works had altered by reason of the existence of the further alleged defects.  This was not done.  Given the adjudicator failed to address the issue raised by s 23(4), and thereby ignored relevant material, the error was jurisdictional.

The decision confirms the primacy of the terms of the building contract in granting a right to make a claim for final payment.  It also reinforces the requirement that an adjudicator must turn his or her mind to the ‘value’ of the works, even in circumstances where the defects alleged existed at the time of a previous adjudication and were only subsequently identified, notwithstanding the provisions in s 23(4) of the Act.