Dear Andrew

On Tuesday the Supreme Court of Victoria handed down its decision in SSC Plenty Road v Construction Engineering (Aust) & Anor [2015] VSC 631 which will have significant repercussions for companies operating in Victoria in respect of Security of Payment Act claims and the drafting of dispute resolution clauses in construction contracts.

What was the issue?

The issue before the Court was whether compulsory mediation (without more) constituted "a method for resolving disputes" under the relevant contract for the purposes of section 10A of the Building and Construction Industry Security of Payment Act 2002(Vic).

One of the quirks of the Victorian Security of Payment Act, section 10A limits the extent to which a claimant can include claims for variations that are not agreed between the parties in a payment claim under the Act in circumstances where the contract includes a "method for resolving disputes".

The dispute resolution provisions of the contract in question included a compulsory meeting following notification of a dispute, and failing resolution at that meeting, mandatory mediation. There were no additional mandatory steps following an unsuccessful mediation. If there was any doubt as to whether mediation constituted "a method for resolving disputes" under the Act, it has now been displaced by Vickery J's decision.

His Honour confirmed that in order to satisfy section 10A, a dispute resolution process whereby a third party is engaged to hear and determine the dispute and resolve the dispute by delivery of an award which is binding on the parties is required. Both arbitration and binding expert determination were identified as examples that satisfy this definition.

Who is affected?

Claimants under the Security of Payment Act in Victoria with contracts that only provide for mediation (whether optional or mandatory) or other non-mandatory dispute resolution mechanisms that do not result in the delivery of a binding award have had their ability to include claims for variations without limit confirmed.

For principals and head contractors who now face such claims, it may prompt changes to their organisation's standard form contracts (or more drastically, cause them to seek variation of dispute resolution provisions in existing contracts) to include a dispute resolution mechanism that satisfies the requirements of section 10A. It is likely that a binding arbitration or expert determination clause is required. Whilst such a response is not unexpected, the decision to submit to arbitration or expert determination should not be made hastily and those parties should weigh up the benefits and disadvantages of such dispute resolution mechanisms in all the circumstances, which includes gaining the ability to limit some variation claims under the Security of Payment Act. Indeed, for those parties with experience operating outside of Victoria where no such limitations on claiming variations under security of payment legislation exist, the situation contemplated is unlikely to appear all that frightening.