As a result of the 26 May 2016 Victorian Supreme Court of Appeal decision in SSC Plenty Road Pty Ltd ("SSC Plenty Road") v Construction Engineering (Aust) Pty Ltd ("Construction Engineering") [2016]VSCA 119, the Victorian construction industry should take note:

  • If the dispute resolution process in a construction contract for work in excess of $5 million does not include a binding "method of resolving disputes", contractors may validly claim disputed variations in payment claims under the Building and Construction Industry Security of Payment Act 2002 (Vic) ("the SOP Act").
  • Adjudicators appointed under the SOP Act to make determinations as to the value of disputed variations and provisional sums must take into account all information available and are not bound by the Superintendent's valuation of work.

Background to appeal

The appeal arose out of a construction contract between SSC Plenty Road and Construction Engineering for the design and construction of a shopping centre in Victoria with a contract value of approximately $35 million.

The contract contained a tiered dispute resolution clause which required the parties to meet to discuss the dispute, followed by attendance at a mandatory mediation.  If the dispute was not resolved at mediation the claimant was required to litigate the dispute in court.

In November 2015 the Victorian Supreme Court held in SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [2015] VSC 631 that a contractual provision compelling disputing parties to attend mediation, without more, could not be considered a "method of resolving disputes" for the purposes of the SOP Act.  Further, the Court held that the dispute resolution process must:

  • reflect a "method" of resolving disputes;
  • be capable of producing a final and binding outcome made by a third party; and
  • bind the parties to a decision.

The Supreme Court also determined that litigation does not constitute a "method of resolving disputes" for the purposes of the SOP Act.  The Supreme Court considered inclusion of litigation as a step in the dispute resolution process to be merely a restatement of pre-existing legal rights.

We previously reported on the ramifications of the Supreme Court's decision in our client alert of 18 November 2015.  

The Supreme Court was also asked to consider what was required of an adjudicator to properly discharge his or her functions.

In response to this question, the Court found that an adjudicator must, at a minimum, specify the works performed or goods and services supplied under the contract and then value these works or goods and services.  To properly discharge this role, the adjudicator must state the basis upon which amounts have been awarded taking into account the evidence of both parties.  An adjudicator cannot therefore merely accept and rely upon the submissions of one party, and reject those of the other.

Does mediation constitute a "method of resolving disputes"?

The Court of Appeal agreed with the Supreme Court's findings and found that as a matter of language, purpose and context of the SOP Act, mediation and other mechanisms which do not result in a binding resolution do not constitute a method of resolving disputes.  Other non-compliant mechanisms would include expert appraisal and expert determination or dispute resolution board ("DRB"), to the extent that the determination of the expert or DRB is not binding.  

The Court of Appeal noted that the legislature chose to speak of "resolving disputes", rather than "addressing disputes", which the Court considered highlighted the need for "resolution" of a dispute.  While mediation offers a forum for discussion, it does not impose a final resolution and was therefore determined to be of insufficient finality to satisfy the language of the SOP Act.  

The Court of Appeal reviewed the stated purpose of the SOP Act: providing construction contractors with access to entitlements to progress payments.  It observed that if the SOP Act merely directed parties to a forum in which a dispute may not be resolved, failure to reach resolution would deprive contractors of their legislative entitlement to payment.  To fulfil the legislative intention, methods of resolving disputes must, without fail, result in their resolution.  

The Court of Appeal contrasted the method of resolving progress payment disputes for projects under $5 million (independent adjudication), against contractual arrangements for projects in excess of $5 million.  The certainty provided by the former was said to further indicate the intention of the legislature and should guide the expectation of the binding nature of the dispute mechanism required in respect of the latter.  Given the historical difficulties for contractors in enforcing their rights to progress payments, the Court of Appeal was emphatic that any alternative contractual arrangements must provide a means of securing a binding amount.  

Contractors are now entitled to make payment claims under the SOP Act for disputed variations for work done on construction contracts with a contract price in excess of $5 million, where the dispute resolution procedure does not bind the parties.  This allows contractors to take advantage of the rapid and cheap claimant-friendly procedures under the SOP Act in respect of claims which could previously have been made only by the slower and more expensive dispute procedures under the relevant contract, most commonly ending in litigation.   

The two SSC Plenty Road decisions expand the scope of claims which contractors may include in payment claims under the SOP Act, potentially improving both contractor cashflow and relative bargaining position against principals.  Conversely, the consequence for principals is a potential significant increase in the amounts for which principals will be liable under SOP Act adjudications.

Can an adjudicator determine the price for work under a contract that is different to that certified by the Superintendent?

In the Court of Appeal, SSC Plenty Road argued that an adjudicator may not undertake a valuation of variations or provisional sum items which resulted in a higher figure than the price previously determined by the Superintendent.

Construction Engineering contended that the provisions of the SOP Act have primacy over the provisions of the construction contract and, therefore, any provision of a construction contract which purports to limit the adjudicator's functions in respect of the valuation of variations or provisional sum items will be void pursuant to s 48(2) of the SOP Act.  

The Court of Appeal held that the adjudicator has no role under the contract.  That is, the adjudicator's role is provided for entirely in the SOP Act, and is therefore statutory.  It exists irrespective of the specific contractual terms.  The SOP Act specifically requires the adjudicator to undertake a valuation of the construction work contained in a payment claim if the contract makes no express provision with respect to the value of construction work.  

As a result, requiring the adjudicator to adopt the price certified by the Superintendent would be inconsistent with the adjudicator's role under the SOP Act.  Their Honours unanimously adopted the views of the trial judge, observing that "the mere adoption of the Superintendent's certificate, without more, would be inconsistent with the adjudicator's statutory task of independently assessing value".

It is a timely reminder that the adjudicator is independent from the parties and has a duty which sits apart from and is unconstrained by the contract and is determined by the SOP Act.

What you should do

If you are drafting a contract for a Victorian project, remember:

  • If the work is for consideration in excess of $5 million, and the parties intend that the contractor should not include disputed variations in its payment claims, the contract dispute mechanism must result in a binding determination.  Mediation does not satisfy this requirement.
  • The adjudicator is not bound by the Superintendent's pricing of construction work.
  • Clauses which attempt to contract out of these obligations, or are otherwise inconsistent with the SOP Act, will be void.

If you have an existing contract for a Victorian project, remember:

  • Principals should review contracts to determine possible exposure to SOP Act claims in respect of claims previously considered to be outside the scope of adjudication.
  • Contractors should conversely review contracts to assess potential entitlements to make claims under the SOP Act previously considered to be excluded.

Further, parties to existing contracts should note that a contractor may now be entitled to make claims under the SOP Act for payment for historical work undertaken in respect of disputed variations, provided the contractor is still within the time limitations provided under the SOP Act.