Victorian courts will not award claims containing ‘excluded amounts’

In a recent decision[1] that will have important implications for claimants making statutory payment claims in Victoria, the Victorian Supreme Court has decided that if a payment claim contains an excluded amount under the Building and Construction Industry Security of Payment Act 2002 Act (Vic) (Act), the Court is precluded from giving a judgment in favour of the claimant. Rather, the claimant should pursue adjudication.

It is well established that the main purpose of the Act was to create a ‘pay now, argue later’ scheme to enable those engaging in construction work, or supplying goods and services, recover progress payments in a timely and cost effective manner. 

This decision contributes to broader policy debate about whether the purpose of the Act is best served by adopting a strict technical or a more flexible approach when interpreting the requirements of the legislation. 

This case arises in a context where claimants, who have not received a payment schedule in response to their payment claim, seek to fast-track recovery through summary judgment in the courts. 

Here, the majority concluded that the purpose of the Act was best served by adopting a strict approach which encourages claimants to proceed to adjudication if the payment claim contains any ‘excluded amount’, rather than to the Court. In this way, the Court’s summary judgment process is reserved only for those cases where no ‘excluded amounts’ apply and the process of recovering a ‘debt due’ summarily is simple. 

Background of the case

Yuanda Vic Pty Ltd (Yuanda) engaged Façade Designs International Pty Ltd (Façade) to install façade elements as part of the construction of commercial and residential towers in Melbourne. Façade performed the works until the contract governing the installation was terminated in November 2019.

On 30 September 2019, Façade provided a payment claim under the Act for $4,584,820.68. On 2 October 2019, Yuanda reduced the amount claimed and paid Façade $1,115,455.  However, Yuanda did not respond with a payment schedule within the required 10 business days under the Act.  

This presented Façade with the option to proceed to adjudication under section 18(1)(b) or to commence court proceedings to recover the unpaid amount as debt due under section 16(2)(a)(i). Façade commenced court proceedings.  

Importantly section 16(4)(a)(ii) provides that the Court cannot give judgment unless satisfied that the claimed amount “[did] not include any excluded amount”. It was common ground between the parties that the claimed amount included interest, which was an ‘excluded amount’ under the Act.

The decisions of the trial judge

The trial judge found that if a payment claim contained an excluded amount, judgment could still be given under section 16(2)(a)(i) of the Act for a lesser amount (that is, the claimed amount less the excluded amount). Judgment was given to Façade. Yuanda appealed this decision.

Decisions of the Court of Appeal

The majority (McLeish and Niall JJA) allowed the appeal, finding that judgment could not be given in favour of Façade because the payment claim contained an excluded amount.

Their Honours adopted a strict interpretation of section 16(4)(a)(ii) of the Act and found that the Court was precluded from giving judgment where the claimed amount contained an ‘excluded amount’. For their Honours, section 16(4)(a)(ii) was clear: a court is not to give judgement to a claimant if the claimed amount “includes any excluded amount”.  

To their Honours, the argument that the excluded amount could simply be deducted from the claimed amount and judgement given for the balance was unattractive, as such a course would require the Court to engage in a detailed examination of whether the amount truly was an excluded amount or not. As the length of the original trial indicated (eight hearing days, written submissions of 350 pages and a book of authorities in excess of 1,500 pages) this was unsatisfactory. 

Extending the Court’s role in this way would “sit uncomfortably with the Act’s clear policy” of encouraging disputes to be resolved through adjudication – “a quicker and more informal processes contemplated by the Act”. To their Honours, the proper course when a payment claim included an excluded amount (or arguably included an excluded amount) was for a claimant to seek adjudication, where the adjudicator was expressly entitled to decide whether an amount was excluded, and if so, give a decision for the balance only. 

In the alternative, Façade submitted that any excluded amount could be ‘severed’ so that section 16(4)(a)(ii) could be satisfied. The majority also rejected this argument. The doctrine of severance could only apply where part of an instrument was invalid and, in limited circumstances, the remainder could be preserved by severing the invalid part. However, in this case, there was no question of validity of the instrument because a claim containing an excluded amount was still a valid payment claim. Therefore, the doctrine of severance had no application.

In dissent, Sifris JA adopted a different approach, opining that the procedure for payment under the Act was not intended to be inflexible or to punish a claimant for putting an excluded amount in the payment claim. 

His Honour concluded that there was nothing in the wording of the Act that prevented the Court from carving out an excluded amount from the judgement award given, and therefore an interpretation which is reasonably open and promotes the purpose of the Act should be given. 

The tone of his Honour’s dissenting judgement appeals to the convenience of the Court being able to adjust the awarded amount to exclude amounts which on the face of the payment claim are excluded amounts. 

Wider context?

The divergent approaches of the Victorian Court of Appeal, while dealing with the narrow question of excluded amounts, does expose the question, should security of payment legislation be interpreted strictly or flexibly?

On one hand, it seems sensible that an Act for securing cash flow down the contractual chain be pragmatically and flexibly interpreted so it remains approachable to construction industry participants it seeks to benefit (with varying degrees of financial capacity and sophistication across the industry). 

On the other hand, given security of payment legislation cuts across freedom of contract and inverts the usual power relationship between payer and payee in favour of the former, it seems appropriate that a claimant seeking to invoke the beneficial aspects of the Act also has a commensurate responsibility to comply strictly with the requirements of the Act.

The delicate dance between these competing requirements – making the process flexible and approachable while requiring strict adherence to procedure and form – play out in a tug of war observed in the reported decisions. 

The debate becomes particularly acute when a claimant invoking the Act makes a seemingly minor procedural error. In the Courts, such minor infelicities have long since ceased having an impact on the outcome of litigation. As Bowen LJ famously said in Cropper v Smith:[2] 

"Now, I think it is a well-established principle that the object of courts is to decide the rights of the parties, and not to punish them for mistakes they make in the conduct of their cases by deciding otherwise than in accordance with their rights. Speaking for myself, and in conformity with what I have heard laid down by the other division of the Court of Appeal and by myself as a member of it, I know of no kind of error or mistake which, if not fraudulent or intended to overreach, the Court ought not to correct, if it can be done without injustice to the other party. Courts do not exist for the sake of discipline, but for the sake of deciding matters in controversy, and I do not regard such amendment as a matter of favour or of grace."

In the realm of security of payment legislation, such procedural matters are often dealt with far more severely. For instance, should a payment claim fail to specify the construction work for which it claims with sufficient detail, there is no ‘second chance’ to fix it (as would generally be available with pleadings). The payment claim is therefore invalid.[3] 

From the respondent’s perspective, as is well known, should a respondent file a payment schedule even one day late the payment schedule will be held inoperative and the respondent becomes liable for the entirety of the claimed amount. Few other instances of modern litigation in Australia apply such severe consequences to the late taking of a procedural step. 

On the other hand, the traffic is not all one way, and we regularly see instances of wide pragmatism and tolerance of mistakes in security of payment legislation. For instance, since the High Court's decision in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd[4] adjudicators in New South Wales are free to make ‘errors of law on the face of the record’ without court interference. This ‘right to be wrong’ provides a wider latitude for mistakes than many permanent lowers courts and tribunals enjoy in Australia. 

But for the moment, the Victorian Court of Appeal’s approach might be seen as a victory for ‘strict interpretation’. 

Looking ahead

The position in Victoria is now tolerably clear. Where a payment claim contains an excluded amount under the Act, the Court will be precluded from giving a judgment in favour of the claimant.

The wider question will be two-fold: will other decisions’ interpretation of security of payment legislation be attracted by the ‘strict approach’ of the majority? And, more commercially, will the decision change claimant behaviour?

In relation to this second point, traditionally, while a claimant faced with an un-responded to and unpaid payment claim has always had the option of seeking adjudication for the claimed amount and seeking a court judgement for the claimed amount, option one seemed otiose and unattractive. Why would a claimant go to the expense and uncertainty of adjudication when they could simply proceed direct to court and have the claimed amount certified as a judgement debt? 

However, following the Court of Appeal decision we may increasingly see claimant selecting for adjudication on a far more regular basis, to avoid the real risk of a Court denying their claim on the basis it had been poisoned by the presence of an excluded amount. 

Alternatively, the return to observing strict technicality exposed by the majority may turn potential claimants away from the legislation altogether, preferring to shy away from the risks of getting it wrong and sticking to more familiar, but less attractive, contractual recourses to payment. 

As in all things, time will tell.