SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd  VSCA 119
The Victorian Supreme Court of Appeal has unanimously upheld Justice Vickery's judgment in SSC Plenty Road v Construction Engineering (Aust)  VSC 631. The decision confirms that dispute resolution clauses which do not result in a final and binding determination are not a 'method of resolving disputes' under section 10A(3)(d)(ii) of the Building and Construction Industry Security of Payment Act 2002 (Vic) (Act). This effectively means that if a contract does not provide for disputes to be resolved by way of expert determination or arbitration the disputed variations will be claimable by the contractor under the Act, irrespective of the value of the contract or the variation claims (provided the other requirements in section 10A(3) are satisfied).
The Court of Appeal also confirmed that in determining a claim under the Act an adjudicator is required to value work (including variations) independently and should not merely adopt the superintendent’s certified value.
The case concerned an adjudication determination arising out of a construction contract between SSC Plenty Road Pty Ltd (SSC) as the principal and Construction Engineering (Aust) Pty Ltd (Construction Engineering) as the contractor for the design and construction of a shopping centre at 850 Plenty Road, Reservoir in Victoria. The adjudicator gave certain provisional sum and variation items a higher value than that which the superintendent had given them.
Clause 42 of the contract between SCC and Construction Engineering provided that the parties could only take legal action if they had previously engaged in mediation or if 56 days had passed since a notice of dispute had been issued by one of the parties and the matter had not been otherwise resolved.
Relevantly, SSC applied for judicial review to quash the adjudicator's determination on the following grounds:
- that the adjudicator made an error of law or of jurisdiction in finding that the contract did not provide 'a method of resolving disputes' within the meaning of section 10A(3)(d)(ii) of the Act; and
- that the adjudicator failed to value the work in accordance with sections 10 and 11 of the Act, by his decision to price work under the contract differently from the price determined by the superintendent.
At first instance Vickery J dismissed these complaints. SSC appealed.
Refresher: 'claimable variations' under the Act
Pursuant to sections 10B(2)(a) and 23(2A) of the Act, any amount that relates to a variation will be an 'excluded amount' – and therefore cannot be not be taken into account in calculating the amount of a progress payment – unless it meets the description of a 'claimable variation'.
Claimable variations are dealt with in section 10A, and there are two classes:
- The first class relates to variations which are essentially agreed between the parties in all material respects, as detailed in section 10A(2) (though note that such agreement must have crystallised prior to the payment claim being issued under the Act – see Seabay Properties Pty Ltd v Galvin Construction Pty Ltd  VSC 183 at ).
- The conditions for claiming the second class of claimable variations are dealt with by sections 10A(3) and (4). These may be broadly described as 'disputed variations' and, among other things, may only be claimed if the original contract price is $5 million or less, or if it is over $5 million and there is no 'method of resolving disputes under the contract'. There is a further monetary limit placed on claims for class 2 variations where the total amount of such claims reaches 10% of the original contract price. In such cases, no further class 2 variations may be claimed unless the original contract price is $150,000 or less or if it is over $150,000 and there is no 'method of resolving disputes under the contract'.
Court of Appeal Findings
1. Did the contract provide a method of resolving disputes?
The Court of Appeal concluded that this clause did not meet the description of a 'method of resolving disputes' under the Act. Applying techniques of statutory construction, their Honours noted that section 10A(3)(d)(ii) requires a method of 'resolving', rather than 'addressing' disputes. Further, the broad phrase 'alternative dispute resolution' which encompasses arbitration and mediation, does not appear in the statute. Consequently, the Court held that a method employed to resolve disputes under the contract must result in an actual resolution of the dispute, as opposed to merely providing a forum for the discussion of the controversies between parties.
After examining case law, the provisions of the Act and the second reading speeches, their Honours concluded that the main purpose of the Act is to provide ‘rough and ready’ entitlements to progress payments for builders under construction contracts, notwithstanding that builders might ultimately be required to refund the money and may even be unable to repay the debt. This purpose reinforced the finding that section 10A(3)(d)(ii) only applies where a construction contract provides alternative means of securing a binding amount for the builder, as any contrary interpretation would effectively deprive the builder of their statutory entitlement and enable parties to contract out of the provisions of the Act.
It is interesting that no regard was had by the Court of Appeal (or the lower Court) to the different wording used in the worked example which accompanies section 10A(4) of the Act. This example seeks to explain how the 10% cap on disputed variations is intended to work. The example does not use the words 'method of resolving disputes'. Rather, it talks of the hypothetical contract containing 'a dispute resolution clause', which has a far broader meaning and would arguably encompass non-binding processes such as negotiation, mediation and binding or non-binding expert determination, as well as arbitration. There are also three worked examples in the Explanatory Memorandum to the 2006 Bill that introduced the excluded amounts regime, all of which similarly refer to a 'dispute resolution clause'. While such examples are not determinative in the interpretation of legislation, the use of the term 'dispute resolution clause' does suggest that the drafters may have intended the words 'method of resolving disputes' to have a broader meaning than that which was ultimately found by the Court.
The Court also confirmed that parties cannot simply agree between themselves that a dispute resolution clause is a 'method of resolving disputes' for the purposes of the Act when it would not amount to such a method in the absence of that agreement. In this case, clause 42 contained an acknowledgment that 'the process set out in cl 42 is a method for resolving disputes under the Contract for the purposes of s 10A(3)(d) of the [Act]'. The Court construed this as an attempt to contract out of the provisions of the Act, which is void pursuant to s 48(2).
Was the adjudicator bound to adopt the superintendent’s pricing?
Sections 10(1)(a) and 11(1)(a) of the Act require an adjudicator to value work 'in accordance with the terms of the contract'. As the construction contract made provision for the superintendent to value various items of works, including provisional sums and variations, SCC interpreted sections 10(1)(a) and 11(1)(a) as effectively requiring the adjudicator to adopt the price determined by the superintendent.
The Court of Appeal disagreed with SCC and affirmed Justice Vickery's conclusion that the Act requires an adjudicator to independently assess the value of the works. The Court reasoned that a contractual provision which requires the adjudicator to merely adopt the superintendent's certificate would be void for attempting to exclude, modify or restrict the operation of the Act in accordance with section 48(2).
Their Honours adopted McDougall J's reasoning in Abacus Funds Management Ltd v Davenport  NSWSC 1027, confirming that a reference to a valuation ‘in accordance with the terms of the contract’ is a reference to the contractual mechanism for determination of that which is to be calculated or valued, not to the person who, under the contract, makes that valuation.
In the present case, the parties agreed that the contract made no express provision in respect of the construction work that was to be valued. Their Honours held that in such circumstances section 11(1)(b) of the Act applies, requiring the adjudicator to 'have regard to' certain matters, including the contract price. Their Honours reasoned that such a provision cannot be understood to mean that the adjudicator is bound by the contract price, and suggested (without formally deciding the point) that the matters the adjudicator must have regard to in section 11(1)(b) may not be exhaustive.
Accordingly, both grounds of appeal were rejected and the appeal was dismissed.
Practical implications and comment
In light of this decision contractors and principals should review dispute resolution clauses in existing construction contracts for work in Victoria to establish their potential entitlements or liabilities with respect to disputed variations. Assuming contractors are not time barred, they may be able to claim for previous works completed in respect of disputed variations if the contract provides for disputes to be resolved by way of negotiation, mediation or non-binding expert determination.
For principals looking to exclude a contractor's ability to claim disputed variations under the Act, it is now clear that your construction contract must contain a method of resolving disputes that results in a final and binding outcome, such as binding expert determination or arbitration. Conversely, and somewhat curiously, contractors who would like to preserve their ability to resolve variation claims via statutory adjudication may now need to consider resisting these sorts of dispute resolution methods if possible.
While the decision may be technically correct, it highlights once again the unsatisfactory nature of the Victorian security of payment legislation, and in particular its unique excluded amounts regime. The whole purpose of the legislation is to promote cash flow through the construction supply chain (and hence reduce the risk of insolvencies) by providing a means for contractors to claim and be paid amounts they are properly entitled to on an interim basis as work progresses. One of the most common breeding grounds for disputes during a construction project is changes to scope and resulting claims for variations. There is often a lot of money tied up in these claims.
It is therefore somewhat ironic that an Act which is designed to resolve payment disputes speedily and on an interim basis then forces the parties back to a final and binding form of contractual dispute resolution which, particularly in the case of arbitration, can be quite a time consuming process. While this approach is understandable in the case of high value construction projects that typically involve large and sophisticated entities, the same may not be true for smaller value projects.
The excluded amounts regime was introduced almost 10 years ago. Since then there has been a boom in Victorian construction, along with a resulting increase in construction costs. Given this, it might be questioned why Parliament has not sought fit to revise the monetary caps for disputed variations claims under sections 10A(3)(d) and (4). In the absence of more far-reaching reforms to the Act (which do not appear imminent), the Victorian legislature may at least wish to consider revising the caps to enable the more vulnerable contractors at the lower end of the market to have access to the disputed variations regime, irrespective of whether or not the construction contract contains a 'method of resolving disputes'.