The recent decision of the Supreme Court of Victoria Goldwind Australia Pty Ltd v Ale Heavylift (Australia) Pty Ltd (Golden Wind) provided much needed clarification as to whether the damages (LD) deducted by a principal for the late completion of a project constitute an “excluded amount” under the Building and Construction Industry Payment Security Act, 2002 (Vic) (Act).
Under section 10B of the Act, there are certain types of claims known as “excluded amounts”, which may not be taken into account when calculating the progress payment to which a person is entitled. These include the amounts relating to:
- a claim for compensation due to the occurrence of an event, including time costs; and
- damages for breach of contract.
The regime of “excluded amounts” is peculiar to Victorian legislation.
Front case Golden Wind
In the case of 2011 Seabay Properties Pty Ltd v Galvin Constructions (Maritime bay), the Supreme Court concluded that:
- the concept of “excluded amounts” extends to amounts claimed by a defendant in a payment schedule; and
- LO claims are “excluded amounts”, so an arbitrator cannot consider a defendant’s claim for compensation for LOs when assessing a claim for payment.
Maritime bay was a controversial decision and often led to the perverse result of entrepreneurs:
- being behind on a project due to delays in their own manufacture;
- be liable for damages for late completion; and
- seeking to avoid their liability for damages by recovering 100% of the contract sum by way of a claim under the Act, on the grounds that LOs should be disregarded by the arbitrator.
However, two cases in 2018 and 2020 appeared to limit the application of Maritime bay.
- First come Shape Australia Pty Ltd v The Nuance Group (Australia) Pty Ltd (Form), Digby J. found that a contractor’s claim for collection of LOIs collected in a previous payment cycle was too an “excluded amount”. You can read our eAlert on Form in full here.
- Second, in VCON v Oliver Hume and Anor, Justice Stynes concurred with the comments of Justice Digby in Form. VCON linked to a claim by the contractor for reimbursement of the proceeds of the bank guarantee collected in respect of the contractor’s alleged liability for LDs under the relevant construction contract. Justice Stynes concluded that:
“Any attempt by a party to recover fixed damages received in a previous accounting period is a claim for an excluded amount which should not be taken into account in calculating the amount of a deposit. This principle stems from the decision of Digby J in Shape. “
Up to Golden Wind, so the position seemed to be that the two the withdrawal of LD by a respondent in a payment schedule, and a subsequent request from the contractor to recover the LDs already withdrawn, are “excluded amounts”.
In early 2020, Goldwind hired Ale Heavylift (Ale) under a subcontract for the use of two specialized cranes to erect wind turbines for the Stockyard Hill Wind Farm project near Ballarat, Victoria.
The subcontract provided that Goldwind would pay Ale on a monthly basis based on Ale’s completion rate, which was subject to a productivity adjustment formula.
In May 2020, Goldwind increased Ale’s reach by adding more turbines to be installed in the northern part of the site. The two cranes were then located in the southern part of the site, about 40 km away. One crane took 18 days to move from south to north, and the other took 40 days.
There followed a number of payment cycles (under the Act) whereby Ale made claims for the work performed and Goldwind applied a “delay deduction” on the grounds that the displacement of 40 days for one of the cranes was excessive, and a 25-day allowance was more “reasonable”.
Ale then issued Payment Claim 13, ignoring the “delay deduction” and claiming $ 552,450.92 for work performed that had not been paid by Goldwind. Goldwind re-applied the “delay deduction” to the payment schedule and Ale referred her claim to arbitration.
The arbitrator determined that Maritime bay applied, that Goldwind’s “delay deduction” was an excluded amount, and that Ale was entitled to the amount claimed in the claim for payment 13. Goldwind sought judicial review in the Supreme Court, based on the principles set out in Form.
The Court’s conclusions
The key question for the court was whether Ale’s claim related to work performed under the subcontract or was a claim to recover the “delay deduction”. Ale claimed it was the first, while Goldwind said it was the last – and therefore the claim was an “excluded amount” according to Form.
Justice Stynes determined that, correctly understood, Ale’s claim was a claim for work performed and the arbitrator’s decision was valid. She rejected the argument that if a claimant fails to immediately allow a deduction in a payment schedule, it somehow changes the nature of the claim to a claim to “claw back” previously uncontested deductions. Such an interpretation was not supported by any provision of the Act and was contrary to its primary objective of ensuring that parties carrying out construction work are entitled to collect progress payments.
In drawing these conclusions, Justice Stynes stated that Justice Digby’s observations in Form did not constitute a binding precedent and it was under no obligation to follow them. No mention was made of VCON in the judgment, and it is not clear whether it was raised by the parties in the pleadings.
Incidentally, Justice Stynes also indicated that it might have been open to Ale to argue that the “deduction for delay” could not be taken into account by the arbitrator because this type of deduction cannot be taken into account. was not ‘be taken into account in the evaluation of construction works.’
This is an important and positive decision for applicants. It marks a return of the Court to the principles established in Maritime bay.
After Form and VCON, the general consensus in the industry was that unless a deduction for LD was immediately submitted to arbitration, a subsequent claim for reimbursement of these monies could be characterized as an attempt to “recover” or “recover” Of the DL – and be classified as an excluded amount.
While VCON was not dealt with in the judgment, Golden Wind appears to eliminate the risk for claimants of not immediately returning a disputed LD deduction to arbitration and having its claims characterized as a “clawback” or “clawback” of previously taken LDs. VCON probably stood out as a case concerning the proceeds of a bank guarantee, while Goldwind dealt with a demand for payment for the work performed.
Managers should therefore be aware that an LD established in a payment schedule is unlikely to be successful if challenged by a claimant under the Act – even if the challenge is not made immediately – and should consider whether other contractual protections could be implemented for late completion by the contractor (for example, additional performance guarantee).
Finally, although Justice Stynes’ comments regarding “construction valuation” were not developed in detail, His Honor appears to indicate that a respondent’s ability to apply deductions within a schedule of payment is, in fact, quite limited. If the deduction is not directly related to the valuation of the construction work, it cannot be considered by an arbitrator. This could mean that deductions for items such as chargebacks based on the contractual compensation scheme are not allowed.