Recent cases in the High Court have further clarified and determined how the Security of Payment legislation across Australia is to be interpreted. A significant decision concerns the unenforceability of retention clauses in subcontracts.

Retention money under subcontracts – “pay when paid provisions”

The High Court recently considered the effect of clauses in a subcontract whereby the release of retention money was subject to a certificate of occupancy having been obtained by the head contractor under its head contract with the Principal (Maxon Constructions Pty Ltd v Vadasz [2018] HCA 5).

Under the sub-contract Maxcon was entitled to retain retention monies of 10% of each progress payment up to a total of 5% of the subcontract sum. The applicable legislation in this case was section 12 of the South Australian Building and Construction Industry Security of Payment 2009 (SA) which provides that a “pay when paid provision” of a construction contract has no effect in relation to any payment for construction work or related goods or services under the contract.

The High Court found that the retention money clauses in the subcontract were “pay when paid provisions” as the release of the retention money was dependent upon the operation of another contract, namely the completion of the head contract which in turn would have enabled the certificate of occupancy to issue. As the retention provisions were “pay when paid provisions” within the meaning of section 12(2)(c) of the SA legislation, Maxcon was not entitled to deduct the retention sum from the progress payments to the subcontract.

In Victoria, section 13 of the Building and Construction Industry Security of Payment Act 2002 (Vic) has the same provisions as the South Australian legislation as do all other States except Western Australia and the Northern Territory.

Impact of decision

The impact of this decision is considerable. It is common for subcontracts to contain clauses which enable a head contractor to retain retention money until the completion of the works under a head contract or where some other event under the head contract has occurred, for example expiry of the defects liability period under the head contract. Head contractors will need to review their subcontracting arrangements with subcontractors regarding retention monies so as avoid contravening the Security of Payment legislation by linking payment to a head contract.

Jurisdictional Error and Review of an Adjudicators Decision

In the recent case of Probuild Constructions (Aust) Pty Ltd v Shade Systems [2018] HCA 4 the High Court confirmed that a review of an adjudicators decision is available for jurisdictional error but not for error of law on the face of the record.

Probuild rejected a payment claim made under the NSW Security of Payment legislation by Shade Systems on the basis that it was entitled to set off liquidated damages against the claim. Shade Systems applied for adjudication of its payment claim and was successful with the Adjudicator denying Probuild’s set off and awarding Shade Systems $277,755.03.

The High Court found that the NSW Security of Payment legislation ousted the jurisdiction of the NSW Supreme Court to review adjudications for error of law on the face of the record.

Impact of decision

The effect of the decision in Probuild gives some certainty to decisions made by Adjudicators and prevents potentially costly and time consuming review proceedings for error of law which would frustrate the operation and purposes of the Security of Payment scheme, of which cash flow is but one. The Court noted that the parties’ contractual rights remain even where an Adjudicator may have erred. The decision applies to all States and Territories except Victoria and the ACT. In Victoria and the ACT a party retains the ability to challenge an Adjudicators’ decision for error of law on the face of the record.