Security of Payment update: Claimants beware – fast track judgment will be denied

The Victorian Court of Appeal’s recent decision in Yuanda Vic Pty Ltd v Façade Designs International Pty Ltd [2021] VSCA 44 (Yuanda decision) has narrowed claimants’ access to fast-track relief under the Building and Construction Industry Security of Payment Act 2002 (Vic) (Victorian Act).

The Australian “East Coast model" of the security of payment regime gives claimants a right to recover the claimed amount by summary judgment where respondents fail to provide a payment schedule within the prescribed time.

However, the Victorian Act is unique in that it defines “excluded amounts” that cannot be pursued by either claimants or respondents through the security of payment regime.

Prior to the Yuanda decision, if a payment claim contained an excluded amount, Victorian courts were willing to “sever” those amounts from the claimed amount and to enter judgment against the respondent for the balance of the claimed amount.

The Court of Appeal has now held that if a payment claim contains an excluded amount, summary judgment cannot be entered against the respondent when no payment schedule was provided.

Payment claims and payment schedules

Pursuant to section 15(4) and 16(2) of the Victorian Act, if a respondent fails to respond to a payment claim by providing a payment schedule to the claimant within 10 business days, the claimant then has a choice to either:

• refer the payment claim to an adjudicator; or
• apply to court for a judgment for the unpaid portion of the claimed amount in the payment claim.

Excluded amounts

Section 10B of the Victorian Act defines “excluded amounts” to be:

• variations, other than a specific class of “claimable variations”
• compensation for latent conditions, time-related costs, or change in regulatory requirements
• damages for breach of the construction contract
• a claim arising at law other than under the construction contract.

Facts of the case

Yuanda engaged Façade to install façade elements to the Collins Arch building in Melbourne. Façade served a payment claim on Yuanda for around $4.6 million. Yuanda did not issue a payment schedule and made a payment of around $1.2 million.

Relying on Yuanda’s failure to provide a payment schedule, Façade applied to the Supreme Court to recover the unpaid portion of the payment claim as a debt due under section 16 of the Victorian Act.  During the hearing, Facade conceded that the payment claim contained an amount of $64,154.37 for interest.

The judge, at first instance, entered judgment against Yuanda for around $3.5 million and held that the claim for interest was an excluded amount that Façade was not entitled to recover under the Victorian Act.

The Court of Appeal’s decision

The majority in the Court of Appeal (McLeish and Niall JJA) overturned the primary judge’s finding that the unpaid portion of the payment claim minus the excluded amounts was a debt owing to Façade.  

The majority distinguished the role of the court, which is to determine if a statutory liability exists and, if so, to enforce that statutory liability, from the role of an adjudicator, which can include revisiting the nature and extent of any statutory liability. In their view, the court has a more limited role under the Victorian Act than an adjudicator.

The majority noted that a payment claim that included excluded amounts was valid, but “the ‘claimed amount’ in s 16(4)(a)(ii) is the amount claimed in the payment claim, and if that amount includes any excluded amount the Court is precluded from giving judgment in favour of the claimant”.

The majority further noted that the question of whether a payment claim includes excluded amounts will be determined on the face of the payment claim and supporting documents, and not by resort to any other material.

In dissent, Sifris JA upheld the primary judge’s approach, which was to disregard the excluded amounts and enter judgment for the remainder of the claimed amount. His Honour considered that this approach upheld the text, context and purpose of the Act.

What are the practical effects of this decision?

For claimants:

• if they wish to preserve their rights to seek judgment for the unpaid portion of a claimed amount if the respondent fails to provide a payment schedule, they should take particular care not to include any excluded amounts in their payment claims
• if they wish to include all contractual entitlements within a payment claim (which may fall within the definition of an “excluded amount” under the Victorian Act), then adjudication is the only route to recovery against a respondent under the security of payment regime (bearing in mind that this entails service of a second chance notice on the respondent under section 18(2)(b) of the Victorian Act).

For respondents:

• if they receive a payment claim, a careful analysis should be made to determine whether it contains an excluded amount
• if faced with an application for the entry of judgment, consider inviting the claimant to withdraw the proceeding.

As it has been a common strategy for claimants to include excluded amounts within payment claims, relying on the assumption that a judge has the power to “sever” those amounts from the claimed amount, this decision will likely decrease the number of court proceedings brought under section 16(2)(a) of the Victorian Act and increase the number of adjudications.

An unintended consequence may be that claimants resort to making separate but contemporaneous payment claims — one under the contract seeking payment for all contractual entitlements, and one under the security of payment regime which is free from excluded amounts. While a perfectly lawful exercise, this may result in confusion during the contract administration process and will no doubt increase the burden on project managers and contract administrators who have to prepare and respond to payment claims.

Authors: Kyle Siebel, Jonathan Mills & Tamara Preuss

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Kyle Siebel

Tamara Preuss

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