Last week, the Victorian Court of Appeal confirmed that mediation is not a "method for resolving a dispute" under Victoria's Building and Construction Industry (Security of Payment) Act 2002.1
The case is of particular relevance to contractors and sub-contractors seeking payment claims for variations under the Act, and to principals/developers responding to these types of payment claims.
Under the Security of Payment Act, a party is only entitled to include 'claimable variations' in a payment claim. For those variations which are not agreed between the parties and where the contract sum exceeds $5M, a claim for a variation can only be included in a payment claim if the contract does not provide a method of resolving disputes.
Where a dispute resolution clause within a contract does not contain a method that will result in an actual resolution of the dispute, such as binding expert determination or arbitration, parties to the contract will be able to claim variations in payment claims issued under the Act.
In light of this decision, contracting parties whose contract sums exceed $5M should review their dispute resolution clauses and ensure that they are aware whether such variations can be included in payment claims.
The Victorian Court of Appeal upheld the Supreme Court's decision that mediation is not a "method for resolving a dispute" under the Building and Construction Industry (Security of Payment) Act 2002 (Vic). The decision concerns what variations are "claimable variations" and therefore able to be included in a payment claim issued under the Act.
One class of claimable variations is where the parties agree that the work that is the subject of the variation has been done at the direction of the person for whom the work was carried out, however the parties have not agreed whether the work constitutes a variation of the contract and/ or what the amount of the variation should be. For these types of variations, where the contract sum exceeds $5M and the contract does not contain a "method of resolving disputes", the variation can be included in a payment claim. If the contract does contain a "method for resolving disputes", the variation cannot be included in a payment claim.
One of the Court of Appeal's primary reasons for finding that mediation is not a "method for resolving a dispute" was that it does not necessarily result in the determination of a dispute. While the Court recognised that often mediation did achieve resolution, it said that it was merely a forum for an attempt at resolution, finding that:
…The language used in the statute refers to a 'method of resolving disputes under the contract'. In our opinion, the meaning of 'method of resolving' requires a method that will result in an actual resolution of the dispute, rather than just offering a forum for the discussion of the controversies between the parties, which may or may not lead to their resolution. The word used is 'resolving', not 'addressing'.
The Court of Appeal also said that its interpretation was consistent with the object of the Act, which was to provide a mechanism for the resolution of progress-payment disputes, where contracts have not prescribed one.
Implications for parties to construction contracts
The Court of Appeal distinguished between non-binding or definitive resolution processes like mediation, and processes that provide for adjudication by an independent third party.
Accordingly, it is likely that methods such as arbitration and expert determination would be considered a "method for resolving a dispute" and, as a result, where a contract contained those types of dispute resolution clauses (and the contract sum exceeded $5M), non-agreed variations would not be able to be included in payment claims issued under the Act.
For those parties wishing to exclude non-agreed variations from being claimable in payment claims under the Act (traditionally principals and head contractors), consideration should be given to ensuring that the final step in a dispute resolution process contained in the contract is a binding process, such as expert determination or arbitration.
Parties may wish to consider dealing with different disputes that may arise under a contract in different ways, which may mean that mediation does remain the final method for certain disputes but not for non-agreed variations. However, this type of final dispute mechanism process may then prevent a party from seeking a court determination.
Alternatively, for those parties wishing to include non-agreed variations in payment claims under the Act (traditionally contractors and subcontractors), consideration should be given to avoiding a contract provision with a final binding step in a dispute resolution process, to ensure that they retain the ability to obtain prompt payment for non-agreed variations.