The Victorian Court of Appeal has confirmed that a dispute resolution clause providing for mediation is insufficient to exclude variations claims from the statutory adjudication process under the Victorian Security of Payment regime. The decision also confirms that, when determining the value of a progress payment, an adjudicator is not required to adopt a valuation certified by the superintendent under the contract. Partner Nick Rudge and Senior Associate Luisa Uriarte look at the decision and the practical ramifications for drafting construction contracts in Victoria.
How does it affect you?
- The Victorian Court of Appeal has now confirmed that mediation is not 'a method for resolving disputes' for the purposes of the Building and Construction Industry Security of Payment Act 2002 (Vic) (the BCIPA).
- To take advantage of the ability to exclude certain variation claims from the statutory adjudication process under the BCIPA, contracts will need to contain a dispute resolution clause that secures certainty and finality of a binding amount (eg expert determination or arbitration).
- When drafting construction contracts, parties will need to consider whether all disputes should be resolved using the same dispute resolution method.
The BCIPA provides a statutory adjudication regime for the interim determination of progress payments under construction contracts.
Parties to construction contracts are not permitted to contract out of the operation of the BCIPA1. However, the BCIPA excludes certain variation claims from the statutory adjudication process, including where the contract consideration exceeds a threshold value and the contract provides 'a method of resolving disputes under the contract'2.
Until recently, it was uncertain as to whether an alternative dispute resolution clause providing for referral of disputes to mediation would be sufficient to constitute 'a method of resolving disputes' for the purposes of the BCIPA. In SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd,3 the Victorian Court of Appeal has now determined that such a clause is insufficient.
In relation to the valuation of progress payments by an adjudicator, under similar Security of Payment schemes in NSW and Queensland, the courts have accepted that an adjudicator is not bound to accept the valuation by the superintendent (or other certifier under the contract); rather the adjudicator is required to undertake its own independent assessment. The SSC Plenty case confirms that this approach is also to be adopted in Victoria.
SSC Plenty Road Pty Ltd (SSC), as the principal, entered into a contract with Construction Engineering (Aust) Pty Ltd for the design and construction of a shopping centre for a sum of $35,554,985 (plus GST).
The contract contained a commonly used dispute resolution provision which provided that, in the event of a notice of dispute being delivered by either party, the parties were to meet and use reasonable endeavours (acting in good faith) to resolve the dispute and if the dispute was not resolved within 28 days of the notice, then the dispute was to be referred to mediation in accordance with the terms of the contract.
During the course of the project, Construction Engineering served on SSC a payment claim under the BCIPA for an amount of $4,460,815, which included claims for variations. SSC proposed paying $967,865. Construction Engineering referred the matter to adjudication under the BCIPA. The adjudicator determined the amount to be paid by SSC was $2,172,837 (in addition to the $967,865 already paid by SSC to Construction Engineering).
SSC applied for judicial review of the adjudication determination under the BCIPA. SSC argued, among other matters, that the adjudicator had erred in:
- concluding that the contract did not provide a 'method for resolving disputes under the contract' within the meaning of the BCIPA; and
- adopting values for the variation claims which were different from the valuation determined by the superintendent under the contract.
SSC was unsuccessful on the above points at first instance4 and appealed the decision to the Victorian Court of Appeal.
In a joint judgment, the Victorian Court of Appeal held that a 'method for resolving disputes' for the purposes of the BCIPA requires a method that will result in an actual resolution of the dispute, rather than just offering a forum for discussion of the dispute, which may or may not lead to its resolution. The court considered that the dispute resolution method should provide the same degree of certainty that is achieved under the BCIPA and that this requires a method that secures the certainty and finality of a binding amount. A contractual clause which does no more than require the parties to mediate was found not to have that effect.
For completeness, the Court of Appeal also held that a provision in the contract providing that the parties acknowledged and agreed that the dispute resolution clause provided a method for resolving disputes under the contract for the purposes of the BCIPA could be ignored. Such a provision was considered void as it amounted to an agreement to contract out of the BCIPA.
Is an adjudicator required to accept the contract price determined by the superintendent under the contract?
SSC argued that the parties had agreed under the contract that the superintendent would 'price' work in respect of variations. As the BCIPA requires an adjudicator to value construction work having regard to (among other matters) the 'contract price' for the work5, SSC contended that the adjudicator had no role in reviewing decisions made by the superintendent as to the contract price, which were binding on the parties.
The Court of Appeal held that the adjudicator is not bound by the contract price. The Court of Appeal considered that, if the adjudicator was required to adopt a price stipulated by the superintendent, this would be inconsistent with the requirements under the BCIPA that the adjudicator make an independent assessment of the value of the work.
Mediation is a common (and often successful) dispute resolution method used in the construction industry. However, if the parties to a construction contract (in particular, the principal) wish to carve out disputed variation claims from the BCIPA adjudication process, the contract will need to provide a dispute resolution method for such claims which achieves the certainty of a 'resolution' of the dispute. Such methods include expert determination or arbitration but should exclude mediation.
Importantly, parties to the contract may not wish for all disputes to be resolved using such 'final resolution' methods. Accordingly, the contract may need to be carefully drafted so as to only refer disputed claims for 'final resolution' which are claims capable of being excluded from the BCIPA adjudication process to the extent the contract provides a method of resolving such disputes.
Based on the decision in SSC Plenty, it would appear that it would be open for the parties to have a dispute resolution clause which provided for mediation, but in the event that the mediation failed to resolve the dispute, the clause should provide for relevant claims to be referred to either expert determination or arbitration.
- Section 48 of the BCIPA.
- Section 10A of the BCIPA. The threshold contract value is $5 million or $150,000 (where the total amount of the relevant variation claims exceeds 10 per cent of the contract consideration as at the time the contract was entered into).
-  VSCA 119.
- SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd  VSC 631.
- Section 11(1) and 23 of the BCIPA.