Recent developments

The recent Victorian Supreme Court decision of SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [2015] VSC 631 ("SSC Plenty Road") considered the application of the Building and Construction Industry (Security of Payment) Act 2002 (Vic) ("the Act") and provides new guidance in respect of:

  • what constitutes a "method of resolving disputes" for the purposes of s10A of the Act; and 
  • the obligations of adjudicators when discharging their functions under the Act.

Of particular note to developers, owners and contractors is that the Court found that for a dispute resolution clause to constitute a "method of resolving disputes" for the purposes of the Act, it must produce a final and binding outcome made by a third party.

In light of this decision, you should review all existing and future Victorian construction contracts to ascertain whether the last step in a tiered dispute resolution clause is either binding expert determination, arbitration or a binding dispute adjudication board ("DAB") determination.

If there is no binding final stage in the dispute resolution process, after SSC Plenty, disputed variations will validly be able to be included in payment claims under the Act. For contractors, this greatly expands the classes of claims which may be included in a payment claim under the Act thereby increasing cash flow throughout a project.

On the other hand, for owners and developers, this could significantly increase the quantum of any payments which they are required to make under the Act. Where possible, with existing contracts, principals may even want to consider by agreement varying current dispute resolution clauses to satisfy the SSC Plenty Road decision.

What constitutes a "method of resolving disputes"?

Section 10A of the Act requires that non-agreed variations should be included by the contractor in payment claims where the contract sum exceeds $5 million and the contract does not specify a "method of resolving disputes." In certain circumstances, non-agreed variations for a contract sum between $150,000 and $5 million also are not subject to the Act where the contract specifies a "method of resolving disputes". What is meant by a "method of resolving disputes" has not previously been finally determined by the Courts.

In SSC Plenty Road, 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. The Court found that for the purposes of the Act, the contract did not contain a method of resolving disputes.

Citing Branlin v Totaro [2014] VSC 492, His Honour Justice Vickery noted that dispute resolution clauses that satisfy the Act include  mandatory steps prescribed by the contract which result in a binding decision, made by a third party.

The Court held that mediation merely represented a facility to provide a structured negotiation with a third party mediator directed to resolving the dispute. His Honour acknowledged that while a binding outcome in the form of an agreement may arise out of mediation, if such an agreement is not reached then the dispute will remain unresolved. The mediation has at best provided only an opportunity for resolving disputes. A tiered dispute resolution clause that concludes with mediation consequently does not satisfy the definition of a "method of resolving disputes" for the purposes of the Act. 

As noted above, this means that if parties to construction contracts involving Victorian construction projects, if they wish to exclude disputed variations from payment claims made under the Act, must ensure the contractual dispute resolution clause concludes with an expert determination, arbitration or DAB that is binding in all circumstances.

Affected parties should also note that the Courts have previously determined that a dispute resolution clause which has litigation as its final step will not constitute a "method of resolving disputes" for the purposes of the Act. This is on the basis that a clause which provides for the parties to have recourse to litigation amounts to no more than an affirmation of the parties' existing legal rights.

This will also be of particular significance for parties whose dispute resolution mechanisms involve:

  • binding expert determination for disputes up to a particular monetary threshold, and litigation thereafter;
  • arbitration or expert determination of disputes which is binding, but subject to the ability of a dissatisfied party to commence litigation within a particular time period; or
  • expert determination or arbitration which is subject to further escalation to litigation.

While these types of clauses were not specifically addressed by the Court in SSC Plenty, given comments of Vickery J in respect of the requirement for the dispute resolution clause to be "final" and "binding" it is likely that such clauses would not meet this new threshold.

What is required of an adjudicator to properly discharge his functions?

In SSC Plenty Road, the Court also considered whether the adjudicator had properly discharged his functions in circumstances where he had relied on a formula in his assessment of the claims, particularly in relation to variations.

The Court considered the role and function of an adjudicator and stated that an adjudicator must at a minimum determine the works performed or goods or services supplied under the contract, and the value of those works or goods and services. In doing so, an adjudicator is not required to act as an expert, but equally is not entitled to merely accept the submissions of the claimant and reject those of the respondent. Whilst the quality and depth of analysis in adjudication determinations is necessarily limited by the time constraints of the Act and the often non-legal qualifications of an adjudicator, an adjudicator must still state the basis on which amounts have been awarded and assess such amounts on the basis of evidence before him. 

The Court disallowed the adjudicator's valuation of the variations claimed on the basis that he had adopted a formula in assessing each claim which evidenced that he had not separately analysed the value of each claim.

As a part of the formulaic approach to assessing each claim, the adjudicator had made statements to the effect that the "respondent had failed to establish a sufficient basis to withhold payment". The Court criticised this approach, noting that the adjudicator was required to adopt his or her own method for assessing the value of the claim, in accordance with the contract and the Act, and was not entitled to simply adopt the claimant's valuation.

Following this decision, adjudicators will need to ensure they take a proactive role in determining the valuation of individual claims made by in an adjudication application and provide well reasoned reasons for their conclusions.

What you should do

If you have a construction contract in Victoria which contains a non-binding dispute resolution clause, you should be aware that contractors will now be able to include disputed variations in payment claims made under the Act. Such a change may have a significant impact on the allocation of risk under such contracts, as well as cash flow to both parties.

This is a new and developing area of law, and we will keep you updated as to any future development.