Executive summary
The recent County Court decision of Herbert & Mason Pty Ltd v O’Brien Group Australia Pty Ltd1 (19 May 2021) (Herbert & Mason) highlights the importance in Victoria of a carefully drafted payment claim under the Building and Construction Industry Security of Payment Act 2000 (Vic) (Act) in circumstances where no payment schedule is served and judgment is sought under s 16(2)(a)(i) of the Act.
The case concerned an application by an architect and interior designer, Herbert & Mason Pty Ltd (H&M) for judgment under s16(2)(a)(i) of the Act against the principal, O’Brien Group Australia Pty Ltd (O’Brien), who had failed to serve payment schedules in response to H&M’s payment claims.
In light of the Court of Appeal’s decision on 5 March 2021 in Yuanda Vic Pty Ltd v Façade Designs International Pty Ltd2 (Yuanda), Judicial Registrar Burchell held that judgment would not be granted under that section since it could not be satisfied, on the face of the payment claims, that the claimed variations met the requirements for first and second class variations in s 10A of the Act.
What happened?
H&M performed architectural and interior design services for O’Brien. It served payment claims on O’Brien under the Act in June, July and August.
O’Brien failed to issue payment schedules in response to any of them or to make payment. The dispute concerned the August payment claim.
H&M elected to apply for judgment in the County Court under s 16(2)(a)(i) of the Act rather than proceed to adjudication.
Right to apply for judgment
This route is often a more attractive option than adjudication under s 16(2)(a)(ii) as the available defences to it are limited. They generally concern preconditions under the Act to the right to issue a payment claim, for example, whether the work concerns a “construction contract” as defined in the Act or failure to satisfy the formal requirements for a payment claim.
An express defence under s 16(4)(a)(ii) is that the Court must be satisfied that the claimed amount in the payment claim “does not include any excluded amount”.
The list of excluded amounts are set out in s 10B of the Act. Relevantly, they cover any variation that does not fall within the definition of first and second class variations (referred to as “claimable variations”) as defined in s 10A of the Act.
A first class variation is one in which the parties agree that:
- work outside the scope of the contract has been directed and performed; and
- there is further agreement regarding the value or method of valuation of the variation, the right to claim payment and the time for payment.
A second class variation is one in which the parties agree that work has been directed and performed, but on nothing else. Complex monetary limits, not relevant to Herbert & Mason, are also a requirement for this class of variation.
Prior to the Court of Appeal’s decision of Yuanda, if a payment claim included excluded amounts it was considered possible to at least obtain judgment for the non-excluded amounts by ‘severing’ this from the excluded amounts.3 The Court of Appeal put an end to this when it held that any excluded amount in the payment claim would be fatal to a contractor’s right to obtain judgment under s 16(2)(a)(i) of the Act.
Some have rightly argued that Yuanda adds an unnecessary level of complexity to Victoria’s already complex security of payment regime. Defaulting principals and head contractors have, nevertheless, taken full advantage of this ruling. Herbert & Mason is one such example.4
In opposition to H&M’s application, O’Brien raised two contentions:
a) Judgment should be refused as the Court could not, in accordance with s 16(4)(a)(ii), be satisfied that the August payment claim did not contain variation claims that fell outside the definition of first and second class variations.;and
b) The August payment claim failed to sufficiently identify the construction work to which it related as it referred non-exhaustively to the claims made.
The second argument succeeded but will not be addressed in this summary.
Did the claim involve excluded amounts?
H&M’s August payment claim provided the barest of details. Variation claims were referred to by number but the payment claim did not otherwise refer to, or provide, any supporting material demonstrating, whether expressly or inferentially, that the claims involved either first or second class variations.
H&M relied on extensive evidence of meeting records and other correspondence passing between the parties to demonstrate that the August claim involved second class variations under s 10A of the Act.
Applying the approach in Yuanda, Judicial Registrar Burchell held that when satisfying itself that the August payment claim did not concern any excluded amounts the Court should not conduct a full investigation into the facts and circumstances. This precluded the Court, for example, from having regard to the extrinsic evidence provided by H&M, such as affidavit evidence of when it said the services were supplied. These are matters which ought to be apparent on the face of the payment claim.
On this basis the application for judgment under s 16(2)(a)(i) in respect of the August claim was refused.
Takeaways
Herbert & Mason is a further reminder that, in Victoria, a party wishing to take advantage of an opponent’s failure to serve a payment schedule must ensure that excluded amounts do not feature in the payment claim.
Importantly, when drafting payment claims that include variations, care should be taken to ensure that all elements of first and second class variations in s 10A are detailed and that all relevant correspondence supporting those elements are attached. If there is doubt as to whether all the elements of s 10A have been made out in a payment claim, the claimant can generally still proceed to adjudication under s 16(2)(a)(ii). An adjudicator, unlike the court under s 16(2)(a)(i), may ‘sever’ excluded amounts.5
If a principal or head contractor inadvertently fails to serve a payment schedule, judgment under s 16(2)(a)(i) can be avoided if, on its face, the payment claim does not properly articulate the requirements in s 10A of the Act and where it is not possible to infer this from any material attached to that claim.
This article was written by Paul Graham, Partner, Brian Rom, Special Counsel and Jane Ku, Solicitor.
1[2021] VCC 620.
2[2021] VSCA 44
3Seabay Properties Pty Ltd v Galvin Construction Pty Ltd [2011] VSC 183 (‘Seabay‘).
4Another is Volan Group Pty Ltd v Prime Build Pty Ltd [2021] VCC 611.
5SeaBay (n 4).
