Insights / February 16th, 2018

Security of Payment – Adjudications safe for now but new risk arises

On Wednesday, 14 February 2018 the High Court handed down its decisions in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4 and Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5.

As our earlier Alert indicated, the key issue before the Court was whether an adjudicator’s decision could be quashed if the adjudicator committed an error of law on the face of the record.

The High Court’s decisions confirm that an error of law on the face of the record which does not go to the adjudicator’s jurisdiction is not a ground for review.

This confirms adjudicators may make incorrect findings of fact and may even misapply the law (as long as the facts and law do not go to their jurisdiction) without their decision being at risk of being set aside.

Whilst the Court’s decisions have not affected the law concerning review of adjudicator’s decisions, the Court’s decision in Vadasz has the potential to impact on principals and head contractors and their use of retention monies as security.

In this regard, the Court found that the retention of retention monies by Maxcon, in the circumstances of the case, amounted to a void “pay when paid” clause (contrary to both the findings of Stanley J at first instance and the Full Court of the Supreme Court of South Australia on appeal).

By way of background:

  1. The subcontract between Maxcon and Mr Vadasz required Mr Vadasz to provide security in the form of cash retention.

  2. The retention amounts were only to be released to Mr Vadasz after set durations from the issuing of a certificate of occupancy by the relevant council and any other approvals “required to enable the Works lawfully to be used for their respective purposes in accordance with [Maxcon’s] Project Requirements.

  3. Section 12 of the SA Security of Payment Act defines a “pay when paid” provision as including a provision of a contract that “otherwise makes the liability to pay money owing, or the due date for payment of money owing, contingent or dependent on the operation of another contract”.

The High Court determined that, in essence, the subcontract’s retention clause made payment of retention monies contingent or dependent on the contract between Maxcon and the owner. This was because the Court found that:

  • the issuing of a certificate of occupancy was dependent upon certification by Maxcon that the building work had been performed in accordance with the “issued documents” (being the documents issued for the purposes of the building work and which included the head contract between Maxcon and the owner of the land), such that “it necessarily follow[ed] that the issue of the certificate depended on completion of the whole project in accordance with the provisions of the head contract”; and therefore

  • the due dates for payment of the retention sums were dependent on the operation of the head contract.

By this finding, the High Court has arguably expanded the application of section 12 beyond unambiguous “pay-if-paid” / “pay-when-paid” type provisions.

On the High Court’s reasoning, section 12 of the Security of Payment Act will now render void clauses which predicate payment on events external to any other contract, if that “triggering” event is dependent on work being done under another contract or on the completion of another contract (even if the event is carried out by a council or other independent party).

As a result, it may be necessary for principals and head contractors to reconsider how their standard retention clauses and milestones are framed in the future and amend their contracts accordingly.

If you have any further queries or would like to know more, please contact Jamie Watts as he would be happy to assist.