Sailing to Byzantium

Navigating one’s way through the byzantine Victorian Building & Construction Industry Security of Payment Act 2002 (Vic) and, in particular its excluded amount provisions, has never been easy, but the recent Victorian Supreme Court of Appeal’s decision in Yuanda Vic Pty Ltd v Facade Designs International Pty Ltd [2021] VSCA44 will no doubt leave many in the industry in a state of utter bewilderment.

Under the East Coast Model, security of payment legislation provides that if a claimant had served a payment claim on the respondent and the respondent had not provided a payment schedule within the prescribed time period, the respondent is deemed to become liable to pay the claimed amount on the due date for payment. In such circumstances, if the respondent had failed to pay the claimed amount by the due date, the claimant can elect to:

1. Recover the unpaid portion of the claimed amount from the respondent, as debt due to the claimant, in any court of competent jurisdiction; or
2. Make an adjudication application in relation to the payment claim.

The policy underpinning such a scheme is to incentivise a respondent to either make prompt payment for the amount claimed or, if the amount is disputed, to provide a payment schedule within a compressed timeframe giving reasons why payment is being withheld. If, however no payment schedule is provided, then the respondent risks the claimant electing to commence proceedings to recover the unpaid portion of the claimed amount as a debt due through the courts and where, in such proceedings, the respondent will not be entitled to bring any crossclaim against the claimant nor raise any defence.

However, as the case of Yuanda shows, under the Victorian legislation, if the original payment claim had included an excluded amount, a claimant is no longer able to avail itself of the right to pursue its claim through the courts. Now the claimant must refer its claim to adjudication.

Case Analysis

Pursuant to a construction contract, relating to a large commercial project, the Claimant agreed to install façade elements supplied by the Respondent. On 30 September 2019, the Claimant served a payment claim on the Respondent for the sum of $4,584,820.00. The payment claim comprised of several items, including a claim for interest which, under the Victorian Act, is an excluded amount. On 2 October 2019, the Respondent paid the Claimant an amount of $1,115,455.00, but did not provide a payment schedule within the 10 business day period after receiving the payment claim. The Claimant elected to commence proceedings against the Respondent to recover the unpaid portion of the claimed amount under s 16(2)(a)(i) of the Act, rather than make an adjudication application. When the matter came to the Court, the Respondent disputed the Claimant’s entitlement to judgement on the ground that the payment claim, contrary to ss 14(3)(b) and 16(4)(a)(ii) of the Act, included an excluded amount.

Section 14(3)(b) provides that the claimed amount in a payment claim must not include any excluded amount. Significantly, s 16(4) provides that where a claimant has elected to commence proceedings under s 16(2)(a)(i) to recover the unpaid portion of the claimed amount from the respondent as a debt:

1. judgement in favour of the claimant is not to be given unless the court is satisfied
   1. ...
   2. that the claimed amount does not include any excluded amount.

The judge at first instance (Riordan J) held that whereas s 16(4)(a)(ii) prevented a claimant from recovering an excluded amount at the time when entry of judgement was sought, this did not preclude the inclusion of an excluded amount at the time of service of the payment claim. Accordingly, as the Claimant did not press for payment of the adjudicated amount, Riordan J held that judgement could be given for the lesser amount¹.

On appeal, the Respondent’s prime argument was that judgement could only be given for the claimed amount and, if an excluded amount is included in the claimed amount, judgement cannot be given and the proceeding must be dismissed.

In accepting the Respondent’s argument, the majority of the Victoria Supreme Court of Appeal (per McLeish and Niall JJA) considered that from a textual, contextual and policy examination, the phrase “claimed amount” in s 16(4)(a)(ii) should be interpreted as “the claimed amount in the payment claim” and that therefore the inclusion of any excluded amount in a payment claim results in a claimant not being able to enforce an unpaid amount as a debt due under s 16(2)(a)(i) of the Act.

Analysis of the Court’s Reasoning

The Court’s textual examination

A claimant’s entitlement to enforce a debt relies on s 15(4) of the Act, which provides that, if a payment claim is served and the respondent does not provide a payment schedule within the prescribed time, the respondent “becomes liable to pay the claimed amount to the claimant on the due date for the progress payment to which the payment claim relates”. Thus, the Court action under s 16(2)(a)(i) involves identifying and enforcing a statutory liability and the statutory liability is a liability to pay “the claimed amount”.

Section 4 defines “claimed amount” to mean:

“an amount of a progress payment claimed to be due for construction work carried out, or for related goods and services supplied, as referred in section 14.”

Section 14, relevantly provides:

2. A payment claim –
   1. must identify the construction work or related goods and services to which the progress payment relates;
   2. must indicate the amount of the progress payment that claimant claims to be due (the claimed amount); and
3. The claimed amount –
   1. must not include any excluded amount.

The Court noted that the definition of “claimed amount” in s 4 is stated to be not just the amount claimed, but the amount claimed, “as referred to in s 14”.

“If s 14(2)(d) were to read as defining the claimed amount as “the amount of the progress payment that the claimant claims to be due”, the reference in s 4 to s 14 would add nothing.”²

The Court’s contextual examination

When considering the context of s 16(4)(a)(ii), the Court made the following four observations:

1. The Court’s task under this provision is to decide whether a statutory liability exists and, if so, whether it is to be enforced and there is nothing in s 16(4)(a) that suggest that the Court may identify or enforce any liability other than that created under s 15(4);
2. In contrast to the role of the Court, if a claimant elects to pursue the unpaid portion of the claimed amount by adjudication, the adjudicator is required to determine the “adjudicated amount” which is the amount of the progress payment, if any, to be paid by the respondent to the claimant³ and the adjudicator in doing so must not take into account any part of the claimed amount that is an excluded amount⁴. The amount determined by the adjudicator then becomes a statutory liability of the respondent⁵;
3. It is noteworthy that s 23(2A)(a) is expressed in different terms to s 16(4)(a)(ii), in that it refers to the adjudicator “not [taking] into account … an excluded amount”, rather than the claimed amount “not [including] any excluded amount”. “Only s 23(2A) uses language directly requiring the decision-maker to put excluded amounts out of account”⁶
4. If an adjudicated amount is not paid, an adjudication certificate may be provided which then gives the claimant the right to recover the unpaid portion of the amount payable as a debt due to that person⁷ with the Court only then being required to be satisfied that the amount payable has not been paid.

Thus, the Court said:

“Taken together, these provisions suggest that the Court has a limited role, confined to identifying and enforcing statutory liabilities as debts. The task of adjudication is larger. Where it takes place, excluded liabilities are expressly required to be deducted and a new statutory liability for the adjudicated amount is substituted. Again, the Court’s role is confined to ordering payment of that amount to the extent it is unpaid.”⁸

The Court’s policy perspective

The Court stated that the Act conveyed the following two relevant policy considerations:

1. Where there are substantive issues in dispute regarding the content of a payment claim, the proper course is to pursue adjudication and this is clearly evident when considering s 3 which sets out the object of the Act, viz: to ensure that any person who undertakes to carry out construction work is entitled to receive and is able to recover progress payments and to establish a procedure whereby any disputed claim can be referred to an adjudicator for determination, with the Court’s function being to order recovery of unpaid amounts; and
2. The Act is at pains to prevent the recovery of excluded amounts:

   “Despite anything in the construction contract, an excluded amount ‘must not be taken into account in calculating the amount of a progress payment to which a person is entitled’: s 10(3), 10B(1). In the course of providing for the service of payment claims and defining their content, s 14 states that the claimed amount ‘must not include any excluded amount’: s 14(3)(b). Section 15(3)(c) requires a payment schedule to identify any amount the respondent alleges is an excluded amount. As already mentioned, an adjudicator must not take into account any part of the claimed amount that is an excluded amount: s 23(2A)(a). An adjudication determination is void to the extent it takes account of an excluded amount: s 23(2B)(b). Review of an adjudication determination is available on the sole ground that the adjudicator included an excluded amount, or wrongly determined that an amount was an excluded amount: ss 28B(3), 28C(2).”⁹

Accordingly, the Court went on to conclude:

“A tolerably clear statutory scheme emerges, by which, if there is a dispute about the extent to which excluded amounts are being claimed, that is a matter for adjudication. If there is no dispute, a claimant may proceed straight to court seeking recovery. At that point, the Court ‘is not to’ give judgment in favour of the claimant unless it is satisfied that the claimed amount does not include ‘any’ excluded amount. Consistent with the policy of the Act to prevent recovery of excluded amounts and the role of the Court in enforcing a liability determined by the statute, the natural meaning of those words is that, if the claimed amount includes any excluded amount, it is not to give judgment.”¹⁰

Insofar as the Claimant contended that s 16(4)(a)(ii) could be satisfied by applying the “doctrine of severance” such as to sever the excluded amount from the claimed amount, the Court rejected such a proposition:

Resort to the doctrine of severance does not salvage the argument. It applies where part of an instrument is invalid and, in limited circumstances, the remainder may be preserved by severing that part. The respondent does not identify an instrument to which the doctrine might apply. It cannot be the Act itself, because no question of its validity arises. Nor can it be the payment claim. That is not simply because treating the claimed amount as something less than that which is indicated in the payment claim would fly in the face of the construction of ‘claimed amount’ which has been identified above. It is also because a payment claim which contains an excluded amount within the claimed amount is still a valid payment claim. That is evident from the requirement that the respondent’s payment schedule identify alleged excluded amounts, and the obligations on the Court and an adjudicator in respect of excluded amounts. If the payment claim were simply invalid, these provisions would have no foundation upon which to operate. Since no question of validity of the payment claim arises, severance is not an issue.”¹¹

Final commentary

This is a significant decision as the Victoria Court of Appeal has emphatically stated that if a payment claim includes claims for excluded amounts (whether, as here, a claim for interest, or, in other cases, claims for non-claimable variations or time-based claims, etc.), then the Court cannot give judgement nor sever the excluded amount so as to give judgement for a lesser amount. This in effect requires a claimant who seeks to recover an unpaid amount as a debt due under s 16(2)(a)(i) to ensure that the payment claim does not include any excluded amount. Given that most payment claims (and particularly payment claims for large amounts) usually include claims for excluded amounts, the appropriate course for a claimant is to refer such a payment claim to adjudication because, notwithstanding that no payment schedule had been issued, an adjudicator is commanded by the Victorian legislation to ensure that the adjudicated amount does not include an excluded amount.

The decision in Yuanda has added a further layer of complexity to a horrendously complex piece of legislation which, by reason of the inclusion of excluded amounts, does little to advance the interest of contractors who seek prompt payment for the construction work they have carried out (or for the related goods and services supplied) so as to preserve their cashflow. It is high time that the Victorian legislature removed the carve out procedure and so bring their legislation in line with those in the other States and the A.C.T.