Section 11(1)(b)(iv) the Security of Payment legislation in Victoria provides that the value of construction work “if any of the work is defective” is to take account of “the estimated cost of rectifying the defect”.  However, that provision only applies where the construction contract contains no terms dealing with the valuation of work: Maxstra Constructions Pty Ltd v Joseph Gilbert & Ors [2013] VSC 243 .

In the Maxstra Constructions case the construction contract required progress claims to be based on the tender breakdown and expressed in percentages against each component and gave the respondent (the head contractor) the right to withhold retention moneys to the extent that the breaches of the claimant (the subcontractor) exposed the head contractor to claims for damages or liquidated damages and gave the head contractor the right to reduce a progress claim to the extent it was not satisfied as to the value of the work.

Vickery J held that those provisions of the subcontract did not amount to “a contractual mechanism which was capable of producing a calculation of the amount due under a progress payment or a valuation of construction work carried out under the relevant construction contract. At best it provided for the broad parameters within which such a calculation or valuation might be conducted…”. Therefore, in Maxstra Constructions section 11(1)(b)(iv) had application and the court went on to consider the possible conflict between that section and section 10B(2)(c).

Deductions for defective work and “excluded amounts” in Victoria

Section 10B(2)(c) says that under the Victorian Security of Payment legislation “any amount claimed for damages for breach of the construction contract” is an “excluded amount” which cannot be claimed in a Security of Payment claim. This issue was raised because the cost of rectifying a defect could be characterised as a claim for damages for breach of contract.

In Maxstra Constructions, Vickery J held that section 10B(2)(c) where it refers to claims for damages being excluded amounts did not include the estimated cost of rectifying defects where section 11(1)(b)(iv) applies:

Claims for “damages” under s.10B(2)(c) are quite rightly treated as separate “excluded amounts”, and are to be disregarded in calculating the amount of a progress payment. The forensic enquiry involved in assessing damages, and the potentially wide scope of any such claim is avoided, thereby reinforcing the limited ambit of the adjudication process contemplated by the Act and its objective of expedition. On the other hand, the enquiry to be conducted under s.11(1)(b)(iv) of the Act, properly confined as it is, as I found it to be, would not be likely to defeat the objectives of the Act.”

Clear rights of set-off, including for defective work, should be included in contracts

If section 11(1)(b)(iv) does not apply (because the construction contract contains terms dealing with the valuation of work) it is important from a respondent’s point of view that there is an express obligation on the person carrying out the valuation of the work under the contract to allow the estimated cost of rectifying the defect if any of the work is defective.

Also, from a respondent’s point of view, it is important that the contract extends to the respondent an express right of set‑off to be able to deduct from any money due to the claimant, other amounts claimed by the respondent against the claimant.

In that regard, an earlier decision of the Supreme Court of NSW in Watpac Constructions v Austin Corp [2010] NSW SC 168 needs to be remembered and in particular McDougall J’s observations that the inclusion of an extremely broad right of set off might fall foul of the no contracting out provisions in the legislation and could be declared void. In Watpac Constructions because it was at least arguable that the set‑off clause included in the contract was “constrained by both express and implied considerations of reasonableness”, McDougall J suggested the set‑off clause would not be declared void under the no contracting out provision