Punton’s Shoes are not one-size-fits-all

I was recently appointed by Adjudicate Today to determine a Victorian Security of Payment matter where the payment claim entirely comprised the release of amounts held in retention.

Some commentators have suggested that retention claims are now precluded from the operation of the Victorian Act because of the decision in Punton’s Shoes v Citi-con¹ and the subsequent application of that decision.²

However, the decision in Punton’s Shoes was squarely based on the contract terms where retention was part of a final reconciliation between the parties, and there was no contract terms for claiming or return of retention. In the contract that I was obliged to consider, the parties had struck out the contract clauses for the settling of accounts at the end of the defects liability period, and the contract expressly provided for the return of retention without any settling of accounts. Therefore, I had to consider whether the application of Punton’s Shoes is limited to contracts with the scheme as described by the court.

I found the following factors relevant:

1. the legislators explicitly intended that section 9(2)(d) of the Act “refers to the fact that a final payment may include money retained by the respondent for the rectification or omission of works”;³
2. the concepts of “security” and “retention” can and do have different meanings under different contracts;
3. the Court in Punton’s Shoes explicitly noted that it was a claim for the payment of half of the retention at practical completion “under this contract” that was not in the nature of a claim under the Act; and
4. the subsequent decisions that referenced Punton’s Shoes did not solely rely on that decision, and in one case qualified Punton’s Shoes because of a different contract term.

A consideration of the above four points led me to the conclusion that Punton’s Shoes does not have wide application to preclude all retention claims from the ambit of the Victorian Act. The analysis required to reach that point required much more time than can be seen in the pronouncements made by commentators that are sometimes little more than sound-grabs of a case outcome, without an analysis of the court’s reasoning. Fortunately for the parties, the adjudication costs fell under Adjudicate Today’s very modest fixed fee charging scheme for small matters.

1. Retention is claimable under the Victorian Act in a Final Payment Claim

The Act was amended in 2006 and additions were that a progress payment may include a final payment for construction works and Section 9(2)(d)(i) provides a reference date for a final payment at the expiry of a period for the rectification of defects. In his second reading speech, the Minister noted that the Bill will “also allow subcontractors to use the adjudication process to access amounts held on trust until the works are complete”⁴, and the Explanatory Memorandum to the Bill noted that paragraph 9(2)(d) “refers to the fact that a final payment may include money retained by the respondent for the rectification or omission of works or the supply of goods and services under the construction contract”.

Gantley v Phoenix⁵ included a considered view that a final payment claim can be described as a final balancing of accounts between the contracting parties, such that after that payment is made, the principal is discharged from further obligations to pay money under the construction contract.⁶ That view was accepted in Cat Protection Society v Arvio⁷ and the same considered view was part of the reasoning for the decision in Mackie v Counahan.⁸ The court in Gantley was of the view that following the 2006 amendments, a final payment claim may include retention claims.⁹

Logically, there can be no final reconciliation between the parties without resolving the balance of any retention or any remaining form of security, and it is entirely possible that when a final payment claim is made at the end of a defects liability period, the only remaining issue is the return of retention.

2. Meaning of “security” and “retention”

While it is commonplace to speak of security as a cover-all concept in construction contracts, in some standard form contracts retention is separately defined from security,¹⁰ in which case the phrase “security in the form of retention” confusingly conflates two different contract terms. They do not mean the same thing, and what separates retention from all other means of ensuring performance is that it is part of the contract sum that is payable if the works are completed in accordance with the contract. The other means of ensuring performance are not part of the contract sum. They are money or money’s worth that is provided before works commence, and when released they are the return something of value but are not a payment for construction work.

By contrast, retention moneys are part of the contract sum that has previously been claimed for completed works,¹¹ but which is only due for payment when certain events under the contract occur. Arguably, that would make the release of retention a payment that is based on an event, which is included in the Section 4 definition of progress payment under the Act. If an adjudicator accepts that one of those events has occurred, and there remain retention funds that have not otherwise been accessed by the holder after following the required contractual procedures, then the appropriate amount becomes due and payable and is part of the adjudicated amount determined by the adjudicator.

A further distinction of retention is that where a party has previously claimed payment for completed construction works but the full value of the claim was not paid because some was held as retention, then section 14(9) of the Act permits the inclusion of amounts from previous claims that are not paid.

3. What was decided in Punton’s Shoes

The reasoning of the court in Punton’s Shoes was that the contract placed retention into a discrete separate fund¹² and there was no provision for a claim for or payment in relation to that fund nor any mechanism to adjust the parties entitlements to retention. Further any sum held in retention was to be part of the final certification process as a reconciliation of each party’s entitlements under the contract¹³ and for those reasons, in particular because the progress payment provisions make no provision for the return or payment of retention, any implied entitlement to retention return at practical completion is not in the nature of a progress payment.¹⁴ For those reasons, the claim was not in the nature of a payment claim under the Act¹⁵ and there can be no reference date.¹⁶

The analysis of the court strongly suggests that a retention claim could be made in a final payment claim.

The analysis of the court also leaves open the possibility that where the parties have clearly agreed to retention, and where the contract clearly includes the return of some amounts held as “retention” at earlier times, then such claims are not precluded from the Act.

Most standard form contracts provide that an entitlement to hold “security” or “retention” is reduced at practical completion, and the holder is obliged to release the amount in excess of entitlement at that time. In most cases, the provider is not required to ask for that release, and the holder is effectively in breach if the excess entitlement is not released. However, most standard form contracts also provide that progress claims may, in addition to claims for completed works, include other amounts or moneys then due, and the superintendent must certify the amount due from that progress claim.¹⁷ Those provisions arguably permit claims for the amounts due for partial retention release and for the certification and payment of those amounts.

Even if the contract is silent, the Act will provide the entitlement to make the claim, and it is not necessary for the contract to include a claiming mechanism if retention is not released when required. Section 14(1) of the Act permits a payment claim to be served by a person who is or who claims to be entitled to a progress payment. It is then for an adjudicator to decide if the amount claimed is due under the contract and that it is not an excluded amount such that a progress payment should be made. But if the adjudicator determines that nothing is payable because retention is not due for release, it does not invalidate the payment claim.

4. Decisions that have applied Punton’s Shoes

All matters involved applications for summary judgement because no payment schedule was served.

Watpac

The defence to a cross-claim regarding two payment claims was that there were no valid reference dates. The payment claims were for the final return of retention, which under the contracts occurred at the end of the defects liability period. The Court noted that the contracts had been terminated before practical completion, and the contract timing for a “Final Payment Claim” had long passed so on that basis the defence succeeded.

The court in Watpac then went on to give the view that the payment claims were not valid claims under the Act, citing Punton’s Shoes.

It must be noted that Watpac was heard on 12 February 2020 and decided on 30 September 2020, whereas Punton’s Shoes was heard on 17 April 2020 and decided on 24 August 2020, making it unlikely that Punton’s Shoes was raised as a defence or that the claimant was given an opportunity to comment on the view that Punton’s Shoes was applicable. Unlike Punton’s Shoes, this was a final payment claim, and it is therefore arguable that submissions as to the applicability of Punton’s Shoes could have been made.

The court also cited Punton’s Shoes for a further view that a “reduction of security” claim refers to a composite sum aggregated over many months that could not readily be addressed or valued or determined by an adjudicator.¹⁸ However, an amount held in retention at any point in time is a factual matter, and the amount which should be returned is generally the subject of a calculation under the contract depending on the event that has occurred (eg: 50% returned at Practical Completion or the return of the balance in a final reconciliation) rather than a valuation of the completed works.

In other words, in determining if an amount held in retention is to be released as part of an adjudicated amount, an adjudicator does not value the construction works under section 11 of the Act. After determining the amount actually held, an adjudicator determines the amount of the progress payment pursuant to section 10(1)(a) of the Act by performing a calculation in accordance with the relevant contract terms without making any valuation under section 11. It is clear from the hierarchy displayed in sections 10 and 11 of the Act that valuation only occurs if the contract does not provide for a calculation, and the valuation sections of the Act are not engaged if the contract provides for the calculation of the amount of the progress payment.¹⁹

Even where a respondent claims offsets, the contractual procedure for recourse must be followed and if it has, it is the offset that may involve a valuation rather than the original contract works from which the retention was withheld.

However, none of the above points if raised would have altered the court’s finding that the payment claim was out of time.

Method Construction

The defence was that the payment claim was not served in relation to a reference date because it included a claim for a return of retention, and the retention claim was alleged to have triggered an earlier reference date that made the claim out of time. The court agreed that the defence was misconceived. The court then adopted the reasoning in paragraphs [110]-[114] of Punton’s Shoes and concluded that in light of that reasoning, the relevant question on the retention claim was not regarding a reference date but was whether the payment claim had validly included a retention claim. On the basis that the payment claim was not just for retention and the contract included provisions for the return of retention, the court found that it was permissible for the retention claim to be included.

The decision supports the view that Punton’s Shoes is effective to the extent of the contract it considered, but not otherwise of general application. If the claim is for retention release and the contract provides for the return of retention, then the claim is not precluded from the Act.

Foursquare CM

The court relied on Punton’s Shoes at [110]-[114] in deciding that the payment claim was not a valid claim under the Act and also decided that under the terms of the contract the defects liability period had been extended.

The court considered extensive submissions on caselaw as to whether retention claims were valid under the Act, including Gantley, Cat Protection Society and Cool Logic but preferred the decision in Punton’s Shoes, stating that it is binding authority unlike the obiter in other matters, it is unequivocal, and it is the most relevant being a claim for retention monies under the Victorian Act.

However, Foursquare CM concerned a final payment claim. Punton’s Shoes only concerned a partial return of retention at practical completion and it is arguable that the obiter views in Gantley and Cat Protection Society regarding final payment claims are the more relevant.

It appears that the parties in Foursquare CM did not make submissions regarding section 9(2)(d) of the Act as noted in the Explanatory Memorandum, or the purpose of a final payment claim as accepted in Gantley, Mackie and Cat Protection Society to be a final accounting. However, such submissions would not have altered the Court’s finding that there was no available reference date because the defects liability period had been extended.

Conclusions

My consideration of the above matters resulted in a conclusion that:

1. retention money can be distinguished from the other methods for ensuring performance because it is part of the contract sum that has been previously claimed but not paid until particular events under the contract occur, and as such it is a payment for construction works;


2. the Act permits a final payment claim to include the return of amounts held to ensure performance, such as retention or cash security;


3. whether or not a payment claim that is not a final payment claim can include the return of cash amounts held to ensure performance is dependent on the specific contract terms under consideration; and


4. the Act does not support the view that a payment claim that is entirely for the return of retention is invalid.

In other words, Punton’s Shoes do not apply in all situations. Those shoes are not “one-size-fits-all”, and each matter requires a consideration of the contract terms and the nature of the claim being made.