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In brief - Disputed variation claimable and certificate not binding

On 26 May 2016, the Victorian Court of Appeal in SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [2016] VSCA 119 affirmed the judgment of Justice Vickery by dismissing the appeal of SSC Plenty Road (SSC) against Construction Engineering (Aust) (CE). The Court of Appeal held that mediation was not "a method for resolving disputes" as contemplated in section 10A(3)(d)(ii) of the Building and Construction Security of Payment Act 2002 (Vic) (SoPA); and that it was open to the adjudicator to determine a price for work under the contract that was different from that certified under the contract by the superintendent.

Court of Appeal upholds SSC Plenty Road v Construction Engineering decision

The Supreme Court proceeding was an application for judicial review of an adjudication determination under SoPA, which is a statutory regime providing parties to construction contracts access to progress payments for work performed. SoPA provides a process by which parties can, on an accelerated timeline, access an independent adjudication to determine progress payment amounts. The purpose of SoPA is to protect cash flow in the construction industry on the principle of "pay now, argue later".

Section 10A(3)(d)(ii) of Security of Payment Act

Section 10A of SoPA, titled "claimable variations", outlines when variations may be taken into consideration when calculating the amount of a progress payment to which a person is entitled. Section 10A(3)(d)(ii) of SoPA provides a specific circumstance in which variations, that are in some way disputed, may be considered when calculating the amount of a progress payment:
  1. the contract consideration must exceed the applicable statutory threshold value and 
  2. the contract must not "provide a method for resolving disputes"
The interpretation of "a method for resolving disputes" has been considerably debated, with principals and contractors taking opposing views.

The Court of Appeal has now clearly stated that a dispute resolution clause that, at its highest, imposes mediation on the parties to the contract, is not a method for resolving disputes.

Section 11 of Security of Payment Act

In relation to the valuation of progress payments by an adjudicator, section 23(1) states that an adjudicator is to determine the amount of the progress payment. Section 11 of SoPA provides for the manner in which construction work carried out under a contract is to be valued. Section 11(1)(a) provides that it is to be valued "in accordance with the terms of the contract". Section 11(1)(b) makes provision for those cases where the contract "makes no express provision with respect to the matter". 

The question for the Court of Appeal was whether a contractual provision which states, in effect, that a progress claim is to be made in accordance with a superintendent's certification, clothes that certificate when issued, with the status of a means to determine value for the purposes of section 11(1)(a) of the Act, which binds an adjudicator.

The Court of Appeal has adopted the position taken in other Australian jurisdictions with similar security of payment legislation (NSW and Queensland) by accepting that an adjudicator is not bound to accept the valuation by the superintendent, or other certifier under the contract, when valuing work.

SSC sought judicial review of adjudicator's determination on progress payment

The adjudication determination arose out of a construction contract entered into between the principal SSC and the contractor CE on 20 December 2013. The contract was to construct a shopping centre at 850 Plenty Road, Reservoir in Victoria, for the sum of $35,554,985.

On 1 July 2015, CE served a payment claim on SSC in the amount of $4,460,815.06. On 14 July 2015, SSC responded by providing a payment schedule indicating that it proposed to pay $967,865.02. CE applied for adjudication of its claim. On 20 August 2015, the adjudicator determined that the amount of the progress payment to be paid by SSC to CE was $2,172,837.57. This amount was in addition to the $967,865.02 that had been paid in accordance with the payment schedule. SSC then applied to the Supreme Court for judicial review of the adjudication determination.

Supreme Court decides on method for resolving disputes and valuing work

Relevantly, there were two issues for determination:
  1. whether the contract provided a method of resolving disputes
  2. whether it was open to the adjudicator to determine a price for work under the contract that was different from that certified under the contract by the superintendent
The particular question for determination was whether clause 42 of the contract, the dispute resolution clause, provided "a method for resolving disputes" as contemplated by section 10A(3)(d)(ii).

Clause 42 provided, in effect, that:
  1. if a dispute arose between the parties, notice was to be given
  2. after delivery of the notice, the parties were to meet and use reasonable endeavours acting in good faith to resolve the dispute
  3. if the dispute was not resolved within 28 days of the giving of the notice, the dispute was then to be referred to mediation according to the terms of the contract
  4. if the dispute was not resolved by mediation, or was not otherwise resolved within 56 days of service of the notice, then either party would pursue its rights at law
Justice Vickery in the Supreme Court held that clause 42 of the contract between the parties was not a method for resolving disputes.

On the matter of valuing work, Justice Vickery found that it was open to the adjudicator to determine a price for work under the contract that was different from the certified amount:
An invitation for an adjudicator to merely adopt a superintendent's certificate, without more, is not a contractual provision of the kind contemplated by s 11(1)(a) of the Act. It does not provide any means or basis upon which an adjudicator may independently undertake the valuation exercise, but rather delegates that task ex post facto to the contractually appointed superintendent. (See SSC Plenty Road v Construction Engineering (Aust) Pty Ltd [2015] VSC 631 at [115].)
 

Appeal Court decides that dispute resolution method requires actual resolution of the dispute

SSC appealed Justice Vickery's decision. The appeal was heard on 21 April 2016 and judgment was handed down on 26 May 2016.

It was not disputed that clause 42 imposed mediation on the parties.

In the joint judgment of Santamaria, Beach and McLeish JJA, the Court of Appeal stated:
By itself, the expression "dispute resolution" may be understood to be confined to methods that result in the determination (by a third party) of a dispute. The phrase "alternative dispute resolution" is a broader term, which is commonly understood to include mediation, as well as arbitration. However, that is not the phrase used in the statue. The language used in the statute refers to a "method of resolving disputes under the contract". In our opinion, the meaning of "method of resolving disputes" requires a method that will result in an actual resolution of the dispute, rather than just offering a forum for the discussion of the controversies between the parties, which may or may not lead to their resolution. The word used is "resolving", not "addressing". ([2016] VSCA 119 at [54].)
 
The joint judgment concluded that the primary judge was correct in holding that clause 42 of the contract did not answer the description given in section 10A(3)(d)(ii) of SoPA (at [63]).

Appeal Court decides that adjudicator not bound by superintendent's determination 

The Court of Appeal, after considering the jurisprudence of other similar jurisdictions came to the conclusion that they agreed with the thrust of those decisions, concluding that under section 23 of SoPA, the adjudicator is required "to determine" the amount of a progress payment. Requiring an adjudicator to adopt a price stipulated by the superintendent would be inconsistent with the making of the determination required by SoPA. Moreover, the SoPA provisions prevail over those in the contract. Were it otherwise, the "no contracting out" section would be rendered ineffective. 

The Court of Appeal agreed with the trial Judge's observation that "the mere adoption of the superintendent's certification, without more, would be inconsistent with the adjudicator's statutory task of independently assessing value" (at [83]).

Considerations around dispute resolution for contractors and principals

Contractors should consider their ability to claim disputed variations in light of the dispute resolution clause in the construction contract. If the contract only provides for mediation, or another method that does not result in a binding outcome, claiming an otherwise excluded amount may be open to contractors.

Principals should review the dispute resolution method included in their contracts carefully to determine if the clause will be "a method for resolving disputes" as contemplated by section 10A(3)(d)(ii). Principals who wish to reduce the ambit of SoPA will want to include a clause that results in a binding outcome on the parties, for example arbitration or expert determination.

The differences between arbitration and expert determination should also be considered. For example, expert determination would provide parties with a relatively cost-effective and timely resolution, however, the expert is given considerable autonomy. Arbitration is more akin to litigation and likely to be more arduous for the parties.

Principals should also consider the effect the chosen method may have on other disputes that may arise between the parties.
 

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​

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