Allens

• Introduction
• All recent publications
• Construction publications
• Construction services

Focus: Liquidated damages not a proper deduction for payment schedules in Victoria

20 June 2011

In brief: The Victorian Supreme Court recently found that liquidated damages could not be deducted in payment schedules made under the state's security of payment legislation, and severed parts of a payment claim that contained claimable variations from those parts that did not. Partner Nick Rudge (view CV) and Senior Associate Nicholas Gallina report.

• Facts
• The decision
• Conclusion

Facts

The builder who was the defendant in the case¹ served a payment claim under the Act that included 57 variation claims. The principal submitted a payment schedule that deducted liquidated damages allegedly owing under the contract. An adjudicator allowed the variation claims but determined that the liquidated damages claims were excluded amounts and therefore ought not to have been deducted.²

The decision

Claimable variations and severance of non-claimable variations from payment claims

The court noted that for a variation claim to fall within the 'first class' of claimable variations under section 10A(2) of the Act, the parties must have agreed the matters set out in that subsection – which include the scope and value of the work claimed, and that the work was a variation.³ The agreement must have been reached before the service of the relevant payment claim and may be oral, written or implied by conduct.⁴

The court found the necessary agreement in the superintendant's previous certifications which were not in dispute. The superintendant had certified nine of the 57 variation claims, before the payment claim was served, without any challenge from the developer. The court found that this evidenced an agreement between the parties about the matters in s10A(2) and that these nine variations were therefore claimable variations.⁵ The remaining variation claims were not claimable variations but excluded amounts under s10B. ⁶

The court severed the invalid parts of the payment claim (the parts that included the non-claimable variations) from the valid parts (the parts that included the nine claimable variations) leaving a valid payment claim. The court found that the adjudication determination, which had taken all 57 variation claims into account, was invalid only to the extent that it was based on the non-claimable variations that were excluded amounts.⁷

Liquidated damages claims are 'excluded amounts'

The court found that the adjudicator correctly treated the developer's claim for liquidated damages as an excluded amount and properly excluded this claim from the adjudication determination.⁸

It found, as well, that claims for liquidated damages are 'excluded amounts' under s10B(2). Such claims fall within the statutory concept of 'time-related costs' in s10B(2)(b)(ii), and also fall within the meaning of 'any amount claimed for damages for breach of...contract or...for damages...in connection with the contract' in s10B(2)(c).⁹

The court also found that the statutory prohibition on excluded amounts applies to payment claims and also applies to payment schedules made under the Act.¹⁰ The court rejected the developer's assertion that the statutory prohibition on excluded amounts applied to claims made by claimants under the Act but not to amounts claimed by respondents.¹¹ Although the court noted that there were aspects of the drafting of the Act that supported the developer's assertion, the contrary position was consistent with the Act's purposes.¹²

The court noted that claims for liquidated damages (as well as claims for non-claimable variations, compensation for latent conditions, time-related costs, changes in regulatory requirements and breach of contract) are not to be resolved under the Act but, rather, under the general law.¹³ In a practical sense, this will often require principals to commence court or arbitration proceedings to enforce their rights.

Payment claims served early are not necessarily invalid

The principal argued that the payment claim was invalid because it was served one day early.¹⁴ The court rejected this argument, finding that the early service did not invalidate the payment claim.¹⁵

The court indicated that payment claims that are served a day, or even a few days, early will not usually be invalid if the work claimed was complete or substantially complete.¹⁶

Requirement to identify construction work

The developer argued that the payment claim was invalid because it did not properly identify the construction work claimed.¹⁷

The court set out the following factors as relevant to determining whether a payment claim identifies construction work according to section 14(2)(c) of the Act:¹⁸

• 'reasonable specificity' of the work done is required to enable a respondent to consider and respond to the payment claim, and to define any issues in dispute for resolution by an adjudicator;
• there is no need to identify the work done with an 'artificial degree of precision and particularity';
• the work must be sufficiently identified 'to enable a respondent to understand the basis of the claim and provide a considered response';
• the description of the work must be 'comprehensible to the recipient party when considered objectively'; and
• it is appropriate to take into account the parties' background knowledge and their past dealings.

The court found that the builder's payment claim was not invalid for failing to identify the construction work claimed.¹⁹ In this regard, it noted that the payment schedule did not say that the developer was unable to make a decision as to whether to respond to the payment claim because the work claimed was not properly described.²⁰ The court also noted that the payment claim was in the same form as 27 previous progress claims the builder had submitted on the same project.²¹

Conclusion

In summary, the inability of principals to deduct liquidated damages in payment schedules in Victoria means that the cash position in relation to payment claims made under the Act can be substantially different from the party's position under the construction contracts and general law. The court's decision makes it clear that the Act will be interpreted in a way that supports its purposes, notwithstanding that the Act's language may support technical arguments favouring different outcomes. Leave to appeal this decision has been granted and it will be interesting to see the appeal court's approach to the issues raised by the case.

Footnotes

1. Seabay Properties Pty Ltd v Galvin Construction Pty Ltd & Anor [2011] VSC 183. Nick Rudge and Law Graduate Loren Atkins reported on Seabay in 'Liquidated damages, excluded amounts and security of payment legislation' (2011) 23(3) ACLB.
2. Seabay at [25] and [29].
3. Subsections 10A(2)(b), (c) and (e) of the Act.
4. Seabay at [40], [49] and [54].
5. Seabay at [56], [57] and [58].
6. Seabay at [59].
7. Seabay at [64], [68] and [69]. The payment claim severance in Seabay was consistent with the severance approach of the Victorian Supreme Court in Gantley Pty Ltd & Ors v Phoenix International Group & Anor [2010] VSC 106, which was decided under the Act as it existed before the 30 March 2007 amendments. In Gantley, the court severed parts of a payment claim that did not properly describe the work claimed, the invalid parts, from the parts of the payment claim that did properly described that work, the valid parts of the payment claim (see Gantley at [116]).
8. Seabay at [128].
9. Seabay at [110], [111] and [115].
10. Seabay at [124].
11. Seabay at [104] and [124].
12. Seabay at [117] and [124].
13. Seabay at [120] and [121].
14. Seabay at [130].
15. Seabay at [138].
16. Seabay at [131] - [133] and [137].
17. Seabay at [139].
18. Seabay at [141].
19. Seabay at [149].
20. Seabay at [146].
21. Seabay at [146].

For further information, please contact:

• Nick Rudge Partner, Melbourne
  Ph: +61 3 9613 8544
  Nick.Rudge@allens.com.au
• Anthony ArrowPartner, Melbourne
  Ph: +61 3 9613 8723
  Anthony.Arrow@allens.com.au
• Emma WarrenPartner, Melbourne
  Ph: +61 3 9613 8856
  Emma.Warren@allens.com.au