Security of Payments Act – New Law

Security of Payments Act

• The High Court held that adjudication determinations made under security of payment legislation are not subject to judicial review for “non-jurisdictional” errors of law.
• The High Court also held that retention provisions will fall foul of the “pay when paid” prohibition if the release of retention depends on the operation of a head contract.
• Although the decisions only relate to
• security of payment legislation in New South Wales and South Australia respectively, the reasoning applies to the security of payment legislation in every state and territory.

Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd & Anor [2018] HCA 4

Shade Systems and Probuild Constructions were parties to a construction contract for the supply and installation of external louvres.  Shade Systems obtained an adjudication determination in its favour. Probuild sought to quash the determination.  The original judge agreed on the basis that the determination contained two errors of law: (1) a finding that there was no entitlement to liquidated damages until practical completion or termination of the subcontract; and (2) a finding that Probuild had to demonstrate that Shade Systems was at fault for the delay for which it claimed liquidated damages.

The Court of Appeal held that the Supreme Court does not have power to quash an adjudicator’s determination for errors of law that relate to the way the building contract is interpreted and applied, and that the supervisory jurisdiction of the Court is limited to jurisdictional errors made by the adjudicator (i.e. errors about whether the adjudicator had authority to make the determination).

The High Court granted special leave to appeal.  It unanimously held that the Supreme Court’s jurisdiction to quash non-jurisdictional errors of law has been ousted by the Building and Construction Industry Security of Payment Act 1999 (NSW).  The Court held that the NSW Act, when read as a whole, evinces a clear legislative intention to exclude the Supreme Court’s jurisdiction.  There were several reasons given by the majority for its conclusion.  Those reasons were largely based upon the common features, objects and purpose of security of payment legislation enacted throughout Australia, including that:

1. the NSW Act aims to ensure that a person who undertakes to carry out construction work under a construction contract is entitled to progress payments promptly and the NSW Act achieves that aim by setting up a scheme that is “coherent, expeditious and self-contained“;
2. the procedure in the NSW Act is not concerned with finally and conclusively determining the entitlements of the parties, but doing so on an “interim” basis;
3. the NSW Act is designed to operate quickly, consistent with the understanding that “cash flow is the lifeblood of the construction industry” – this is reinforced by the detailed and “brutally fast” time limits that apply at each stage; and
4. the NSW Act adopts an informal procedure.

Maxcon Constructions Pty Ltd v Michael Christopher Vadasz (Trading as Australasian Piling Company) & Ors [2018] HCA 5

Maxcon concerned a subcontract to design and construct piling.  Mr Vadasz served a payment claim on Maxcon under the  Building and Construction Industry Security of Payment Act 2009 (SA) (SA Act). The adjudicator determined that retention provisions in the subcontract were prohibited “pay when paid” provisions and did not permit Maxcon to deduct an amount from the progress payment otherwise due to Mr Vadasz.  Maxcon sought an order in the Supreme Court of South Australia that the determination be quashed.  It alleged that the adjudicator made an error of law in determining that the retention provisions were “pay when paid” provisions.  The primary judge dismissed Maxcon’s application for judicial review.  The Full Court again dismissed Maxcon’s appeal.

The High Court granted special leave, but dismissed Maxcon’s appeal on the grounds that the adjudicator made no error of law.  The Court held that the retention provisions in the subcontract were “pay when paid” provisions because the release of retention depended on the operation of a head contract.  In particular, Mr Vadasz was not entitled to the release of retention under the subcontract until Maxcon had completed its work under the head contract and a certificate of occupancy had been issued.  It followed that the retention provisions were “pay when paid” provisions because the release of retention was “contingent or dependent on the operation” of the head contract.

It’s OK to be wrong

The High Court has confirmed that, at least for adjudicators, it is OK to be wrong.  A determination made by an adjudicator appointed under the security of payment legislation is not subject to judicial review for a non-jurisdictional error of law.

Retention

The finding that the retention provisions in Maxcon were “pay when paid” provisions is significant. It is common for subcontractors to provide retention as security and for release of that retention to be dependent upon some event under a head contract.  This is understandable where, for example, a head contractor seeks to ensure that the quality of a subcontractor’s work will satisfy practical completion under the head contract.  Head Contractors should ensure that their retention provisions are carefully drafted such that they do not amount to “pay when paid” provisions or, alternatively, consider whether other forms of security would be more suitable for their purposes.

What Next Step?

If you have any questions or need more information, simply call Sachs Gerace at (02) 9331 5177, and discuss with our construction lawyers in Sydney.