SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2016 0011

SSC PLENTY ROAD PTY LTD (ACN 124 197 128)

Applicant

CONSTRUCTION ENGINEERING (AUST) PTY LTD (ACN 392 781 199)

and

JOHN McMULLAN (in his capacity as adjudicator appointed under s 20(1) of the Building and Construction Industry Security of Payment Act 2002 (Vic))

First Respondent

Second Respondent

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JUDGES:	SANTAMARIA, BEACH and McLEISH JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	21 April 2016
DATE OF JUDGMENT:	26 May 2016
MEDIUM NEUTRAL CITATION:	[2016] VSCA 119
JUDGMENT APPEALED FROM:	SSC Plenty Road v Construction Engineering (Aust) Pty Ltd [2015] VSC 631 (Vickery J)

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BUILDING CONTRACTS – Building and Construction Industry Security of Payment Act 2002 (‘the Act’) – Whether a contractual provision in the relevant construction contract that mandates attendance of the parties at mediation is a ‘method of resolving disputes’ for the purposes of s 10A(3)(d)(ii) of the Act – Purpose of the Act considered – Whether adjudicator valued work in accordance with the Act – Valuation task of adjudicator under the Act considered – Whether terms of construction contract void under s 48 of the Act for inconsistency with the Act.

ADMINISTRATIVE LAW – Judicial review – Determination of an adjudicator appointed under the Building and Construction Industry Security of Payment Act 2002 – Whether error of law amounting to jurisdictional error – Whether adjudicator is bound to adopt pricing by the superintendent.

STATUTORY INTERPRETATION – Construction of legislation to be borne out by its context – CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384.

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APPEARANCES:	Counsel	Solicitors
For the applicant	Mr P Solomon QC with Mr N Wood	Baker & McKenzie
For the first respondent	Mr T Margetts QC with Mr L Connolly	Piper Alderman
For the second respondent	No appearance

SANTAMARIA JA
BEACH JA
MCLEISH JA:

Introduction

In the proceeding below, SSC Plenty Road Pty Ltd (‘SSC’) applied for judicial review of an adjudication determination made by the second respondent (‘the adjudicator’) on 21 August 2015 (‘the adjudication determination’) under the Building and Construction Industry Security of Payment Act 2002 (‘the Act’).[1]
[1]The second respondent filed a submitting appearance.

The adjudication determination arose out of a construction contract entered into on or about 20 December 2013 under which SSC, as the principal, engaged Construction Engineering (Aust) Pty Ltd (‘Construction Engineering’) as the designer and builder, to design and construct a shopping centre at 850 Plenty Road, Reservoir in Victoria (‘the Project’), for the sum of $35,554,985 (plus GST) (‘the contract’).

On 1 July 2015, Construction Engineering served a payment claim on SSC under s 14 of the Act for a ‘progress payment’ in the amount of $4,460,815.06. On 14 July 2015, SSC responded by providing a payment schedule under s 15 which indicated that it proposed to pay $967,865.02. Construction Engineering applied under s 18 of the Act for adjudication of its claim.

On 29 July 2015, Construction Engineering served on SSC an adjudication application under s 18 of the Act seeking, relevantly, a determination that the amount of the progress payment to be paid by SSC to it was $4,460,815.06. On the same day, the adjudicator served a notice, pursuant to s 20(1) of the Act, confirming his acceptance of the adjudication application.

On 5 August 2015, SSC provided its adjudication response under s 21 of the Act. In accordance with a request from the adjudicator, Construction Engineering provided a further response on 10 August 2015.

On 20 August 2015, the adjudicator determined, under s 23(1) of the Act, that the amount of the progress payment to be paid by SSC to Construction Engineering was $2,172,837.57. This amount was in addition to the $967,865.02 which had been paid by SSC to Construction Engineering in accordance with the payment schedule.

Two issues arose for consideration: (a) whether the contract provides a method of resolving disputes and (b) whether it was open to the adjudicator to determine a price for work under the contract that was different from that certified under the contract by the superintendent.

First, s 23(2A) of the Act provides that the adjudicator must not take into account any part of the claimed amount that is an ‘excluded amount’ or any other matter that is prohibited by the Act from being taken into account. Section 10B(2)(a) of the Act provides that any amount that relates to a variation of the contract and is not a ‘claimable variation’ is an ‘excluded amount’.

Section 10A of the Act provides that certain classes of variations may be taken into account in calculating the amount of a progress payment to which a person is entitled in respect of a construction contract. Where the parties agree that the work has been done, but do not agree that the doing of the work constitutes a variation of the contract, the variation is generally claimable in the case of a contract where the consideration exceeds $5,000,000 and the contract ‘does not provide a method of resolving disputes under the contract’.[2] It follows that, in determining the amount of a progress payment, an adjudicator cannot take into account a variation to a high‑value construction contract (consideration exceeding $5 million) in which the parties have agreed to a method of resolving disputes under the contract.
[2]Section 10A(3)(d)(ii) of the Act.

The contract in the present case contains dispute resolution provisions.[3] In particular, cl 42 provides that, if a dispute arises between the parties, notice is to be given. After delivery of the notice, the parties are to meet and use reasonable endeavours acting in good faith to resolve the dispute. If the dispute is not resolved within 28 days of the giving of the notice, the dispute is then to be referred to mediation according to the terms of the contract. If the dispute is not resolved by mediation, or is not otherwise resolved within 56 days of service of the notice of dispute, then either party may pursue its rights at law.
[3]The contract comprises two documents: (a) the Formal Instrument of Agreement and (b) the General Conditions of Contract. The general conditions are contained in Schedule 1. All the clauses involved in the present application for leave are found in Schedule 1.

The adjudicator held that the contract did not provide ‘a method of resolving disputes under the contract’ within the meaning of s 10A of the Act. As a result, he determined that he could take into account ‘variations’ to the contract in calculating the amount of the progress payment.

Second, the contract is for a lump sum, which is defined as the ‘contract sum’ in item 6A of Annexure Part A to Schedule 1 to the contract, and is identified therein as $34,554,985.

Section 11 of the Act provides for the manner in which construction work carried out under a contract is to be valued. Section 11(1)(a) provides that it is to be valued ‘in accordance with the terms of the contract’. Section 11(1)(b) makes provision for those cases where the contract ‘makes no express provision with respect to the matter’.

The contract makes provision for a superintendent.[4] SSC retained the superintendent to perform various functions under it.
[4]Clause 1 of Schedule 1 and item 5 of Annexure Part A.

The superintendent’s functions include making certain decisions that may affect the contract sum. Thus, the superintendent is to ‘price’ work performed by Construction Engineering which relates to a provisional sum in the contract, and the difference between the superintendent’s price for work performed and the provisional sum for that work is ‘added to or deducted from the contract sum’ (cl 3 of Schedule 1). Similarly, the superintendent is also to ‘ascertain’ an amount representing the ‘price’ of a variation of the work to be performed under the contract, and the superintendent’s price for that work is ‘added to or deducted from the contract sum’.[5]
[5]Clause 36.4 of Schedule 1.

A separate function of the superintendent is to issue a ‘progress certificate’ to the parties in response to a ‘progress claim’ by Construction Engineering. A progress certificate is to include a statement as to the amount of progress payment which in the superintendent’s opinion is to be made by SSC to Construction Engineering, or vice versa.[6]
[6]Clause 37 of Schedule 1.

The adjudicator valued various items of work claimed by Construction Engineering, relating to a provisional sum in the contract, by giving the work a higher ‘value’ than the ‘price’ which the superintendent had given the same work under cl 3 of the contract. The adjudicator also valued various items of work claimed by Construction Engineering amounting to a variation, by giving that work a higher ‘value’ than the ‘price’ which the superintendent had given that work under cl 36.4 of the contract.

Present litigation

SSC applied to the Supreme Court for judicial review of the adjudicator’s purported determination. Relevantly, two issues fell for determination. The first issue was whether the adjudicator made a jurisdictional error, or an error of law on the face of the record, in concluding that the contract did not provide ‘a method of resolving disputes under the contract’ within the meaning of s 10A of the Act. The second issue was whether the adjudicator erred by failing lawfully to value the relevant work in accordance with ss 10 and 11 of the Act. SSC contended that the adjudicator had been bound to adopt the values for work fixed by the superintendent under the contract.

The reasons of the trial judge

The trial judge held that cl 42 of the contract did not provide a ‘method of resolving disputes’ under the contract within the meaning of s 10A(3)(d)(ii) of the Act.[7] The clause provided for mediation which ‘without more, at best provides an opportunity for resolving disputes’.[8] He said:

A compulsory mediation may be part of the dispute resolution process prescribed in a [construction] contract, and often is. However, without additional mandatory steps being prescribed involving the production of a binding decision by a third party appointed under the construction contract, … a dispute resolution process which stops at mediation, will not be a method for resolving disputes for the purposes of s 10A(3)(d)(ii).[9]

[7]SSC Plenty Road Pty Ltd v Construction Engineering (Aust)Pty Ltd [2015] VSC 631 (Vickery J) (‘Reasons’).

[8]Reasons [51].

[9]Ibid [52] (emphasis in original).

The trial judge also considered whether a contractual provision which states in effect that a progress claim is to be made in accordance with a superintendent’s certification clothes the certificate, when issued, with the status of a means to determine value for the purposes of s 11(1)(a) of the Act, which an adjudicator is in turn obliged to adopt. He held that it was not open to the adjudicator merely to accept an invitation to adopt the certificate of the superintendent. He said:

An invitation for an adjudicator to merely adopt a superintendent’s certificate, without more, is not a contractual provision of the kind contemplated by s 11(1)(a) of the Act. It does not provide any means or basis upon which an adjudicator may independently undertake the valuation exercise, but rather delegates that task ex post facto to the contractually appointed superintendent.[10]

[10]Ibid [115] (emphasis in original).

On 8 December 2015, the trial judge made orders to give effect to his 13 November 2015 reasons. The orders quashed part of the adjudicator’s determination (order 1), reflecting parts of the determination, on grounds not presently relevant that he held to be affected by jurisdictional error.

The trial judge did not accede to SSC’s application for certiorari to quash the adjudicator’s determination to the extent that it took into account each of the disputed variations. He did not accede to SSC’s application for certiorari to quash (relevantly) the adjudicator’s determination to the extent that the adjudicator had given certain provisional sum items, and variation items, a higher ‘value’ than the ‘price’ of those items as certified by the superintendent. SSC seeks to appeal, by leave, from that identified part of the trial judge’s judgment which did not accede to SSC’s application.

Proposed grounds of appeal

In its application for leave to appeal, SSC proposes the following grounds of appeal:

(1) The trial judge erred in holding that the construction contract between SSC and Construction Engineering did not ‘provide a method of resolving disputes under the contract’ within the meaning of s 10A(3)(d)(ii) of the Act. The trial judge should have concluded that the purported determination of the adjudicator under s 23(1) of the Act was void by operation of s 23(2B)(b) to the extent that it was based on any variation to the construction contract.
(2) Further or alternatively, the trial judge erred in failing to find that the purported determination of the adjudicator is affected by jurisdictional error, or error of law on the face of the record, by reason that the adjudicator attributed a higher ‘value’ to work under section 11 than the ‘price’ for that work as determined by the superintendent under the construction contract. In relation to both provisional sum work items, and variation work items, the trial judge should have concluded that it was not open for the adjudicator to attribute a higher value to each such work item than the price already determined by the superintendent.

SSC seeks orders that the appeal be allowed, and that the adjudication determination be quashed in whole or in part and a declaration that it was void by operation of s 23(2B)(b) to the extent that it took into account any variation to the contract. It also seeks orders that Construction Engineering repay moneys paid by SSC pursuant to the adjudication determination.

Contentions of SSC

In its written contentions, SSC said that the dispute resolution clause in the contract provides a ‘method of resolving disputes’ under the contract within the ordinary meaning of those words. Compulsory conference and mediation are both recognised methods of dispute resolution. In asserting that what is required by the expression is a ‘method which result[s] in the production of a binding decision by a third party appointed under the contract for the resolution of the dispute’,[11] the trial judge erred in effectively confining the expression ‘a method of resolving disputes’ in s 10A(3)(d)(ii) of the Act to an arbitration. SSC argued that one way in which disputes may be resolved is by agreement. Such agreement may be facilitated by a wide variety of methods, including participation in a structured mediation. Further, SSC contended that cl 42 of the contract does more than ‘merely’ provide an ‘opportunity for ‘negotiation’.[12] SSC said that cl 42 obliges the parties to negotiate in good faith to resolve the dispute. SSC contended that the trial judge read the expression ‘method of resolving disputes’ as if it meant ‘method of determining disputes’, and that such a construction was artificial and without support in either the text of the Act or its context. SSC referred to three contextual matters: (1) the Act used the expression ‘determination’ to describe the adjudicator’s essentially arbitral function whereas in s 10A(3)(d)(ii) it had used the word ‘resolution’ and this difference in words permits the presumption that Parliament intended different meanings;[13] (2) that ‘resolution’ includes settlement by agreement is reflected in s 45(5) of the Act which provides that an adjudicator is not entitled to be paid any fees in certain circumstances including where ‘the dispute between the claimant and respondent is resolved’, which ex hypothesi must be by agreement; and (3) s 47 of the Act not only expressly uses the term ‘arbitration proceedings’, which is not used in s 10A(3)(d)(ii), but also uses the phrase ‘any arbitration proceedings or other dispute resolution proceedings’.[14] In these circumstances, there was no justification for the trial judge’s assumption that the expression ‘method of resolving disputes’ in s 10A(3)(d)(ii) was confined to arbitrations.
[11]Reasons [41].
[12]Reasons [49], [51].
[13]SSC referred to Scott v Commercial Hotel Merbein Pty Ltd [1930] VLR 25, 30; Prestcold (Central) Ltd v Minister of Labour [1969] 1 All ER 69, 75.
[14]Section 47(2) and (4).

SSC also contended that the trial judge’s construction of s 10A(3)(d)(ii) would frustrate its ‘apparent legislative purpose’. SSC referred to the second reading speech and the ‘Government’s published policy in the period leading to the enactment’ which was said to devise and propose a ‘safeguard scheme [that] would operate to ensure “fair and prompt payment” for the “small contracting sector”’ and would leave ‘sophisticated or well-resourced parties to high value contracts to devise their own dispute resolution method as appropriate to their particular commercial interests and imperatives’.[15] SSC said there was no justification for adopting a strained construction of the statutory language that would confine the capacity of sophisticated parties to high-value contracts to selecting only some form of arbitration. SSC contended that the trial judge should have concluded that the purported determination of the adjudicator under s 23(1) of the Act was void by operation of s 23(2B)(b) to the extent that it was based on any variation to the contract.
[15]Emphasis in original.

In respect of its second proposed ground of appeal, SSC contended that the trial judge had erred in holding that it was open to the adjudicator to give a price to work that was different from the price for that work as determined by the superintendent.

The consideration under the contract is approximately $34 million, which is defined as the ‘contract sum’.[16] Relevantly, the superintendent makes decisions under the contract that affect the contract sum. In particular, the superintendent ‘prices’ both work performed by Construction Engineering in respect of provisional sums (cl 3) and variations (cl 36.4). The superintendent’s price for such work is then ‘added to or deducted from the contract sum’. It is open to parties to agree that a superintendent may make binding decisions affecting the contract price under a contract.[17] SSC said the adjudicator has no role whatsoever in reviewing such pricing decisions by the superintendent, which are binding on the parties.
[16]Item 6A of Annexure Part A to Schedule 1.
[17]SSC referred to Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (2013) 41 VR 636, 643 [14]–[15], 645 [21]–[22].

The superintendent had priced various items of work pursuant to both cl 3 and cl 36.4 of the contract. Some of that work was the subject of the controversy before the adjudicator. The adjudicator valued those items of work in respect of provisional sums and variations by adopting Construction Engineering’s claimed value. In so doing, he thereby gave the work a higher ‘value’ than the ‘price’ which the superintendent had given that same work under cl 3 or cl 36.4 of the contract, respectively.

SSC said that, while it may be accepted that the trial judge was correct that the mechanism in cl 37.2 for the superintendent to state his ‘opinion’ as to the amount of a progress payment was not an enforceable mechanism for valuing construction work and calculating the amount of a progress payment (ss 10(1)(a) and 11(1)(a)), the adjudicator was not at large in making his own valuations and calculations. SSC submitted that the adjudicator was required by ss 11(1)(b) and 23(2) of the Act to have regard to the ‘contract price’ for the relevant work. In this case, the contract price for the relevant work items was necessarily that which the superintendent had decided it to be. SSC contended that it was not open to the adjudicator under the Act to give the same work a higher value. SSC said: ‘the adjudicator under the contract does not have a role in reviewing decisions made by the superintendent which affect or speak to the contract price’. If it were otherwise, the Act would permit the contractor to be awarded a higher amount on an interim basis than could be payable under the construction contract on a final basis. It was not the purpose of the Act to empower the adjudicator to impose a value that is inconsistent with the contract price which might result in the contractor being overpaid. None of the authorities relied upon by Construction Engineering related to the valuation by an adjudicator of an item in respect of which the relevant contract provided for a superintendent or equivalent person to determine the price of that item as part of the contract sum.

SSC said that ‘[v]iewed in the most benign light, the adjudicator’s determination was, to this extent, at least irrational, and thereby affected by jurisdictional error’. In fact, his (unreasoned) adoption of Construction Engineering’s claims as to the ‘value’ of the relevant work for which a lower ‘price’ had been decided by the superintendent was illustrative of his broader failure to discharge his statutory function of lawfully valuing the relevant work having regard to the contract and the contract price.

Contentions of Construction Engineering

In its written contentions, Construction Engineering said that the natural and ordinary meaning of the expression ‘method of resolving’ disputes employed in s 10A(3)(d)(ii) requires something more than a process which may or may not facilitate the parties reaching subsequent agreement to resolve a dispute, such as mediation or a contractual requirement for the parties to confer. The method needs to bring about a resolution of the dispute.

Construction Engineering also pointed out that s 10A(3)(d)(ii) was introduced by an amendment to the Act in 2006.[18] The purpose of the amendment was to introduce a further class of ‘claimable variations’. The second reading speech made it plain that the expression ‘method of resolving’ had been chosen to ensure that the adjudicator was to have no jurisdiction where the contract provided ‘a mechanism for determining whether there [was] an entitlement to be paid for a variation and for determining the quantum and due date for such payment’. It also contended that the construction given by the trial judge to the expression ‘method of resolving’ did not confine it to arbitrations; there are other methods of resolving disputes, such as expert determinations, that do not involve arbitration. Mediation by itself does not resolve disputes. It facilitates their resolution, but any such resolution ultimately depends on the agreement of the parties. Had Parliament intended s 10A(3)(d)(ii) to refer to a process such as mediation, it can be presumed that it would have employed words that captured the non-determinative nature of mediation: for example, instead of the expression ‘method of resolving disputes’, it would have used words such as ‘a dispute resolution process which may or may not result in the parties reaching a further separate agreement in order to resolve the dispute’.
[18]Building and Construction Industry Security of Payment (Amendment) Act 2006 s 11.

Construction Engineering also contended that the adjudicator was not bound to accept the pricing that the superintendent had certified in respect of any piece of work. Section 23(2) specifies the matters that an adjudicator is to consider when determining an adjudication application. While s 23(2)(b) requires an adjudicator to consider the provisions of the construction contract, it is prefaced by the words ‘subject to this Act’. Thus, the provisions of the Act have primacy over the words of the contract. Further, Construction Engineering said an adjudicator is not bound by any provision in a construction contract which modifies or restricts his task of determining the amount of progress payments. Construction Engineering referred to Abacus Funds Management Ltd v Davenport,[19] in which McDougall J had warned against a construction of corresponding provisions in the NSW legislation to the effect that a claimant’s entitlements were restricted to the amount of the superintendent’s determination under the contract.[20] Such a construction was inconsistent with the provisions in the Act against contracting out and inconsistent with the obligation cast on the adjudicator himself to make a calculation as reflected in provisions such as s 10A. Construction Engineering submitted that approach had been endorsed in several decisions in the NSW Court of Appeal and by trial judges there.[21] Construction Engineering contended that, if an adjudicator were bound to accept the superintendent’s certification, the obligation of the adjudicator to make a determination under s 23 of the Act would be rendered meaningless.
[19][2003] NSWSC 1027.
[20]Ibid [35], [37].
[21]Construction Engineering referred to Transgrid v Siemens Ltd (2004) 61 NSWLR 521 (Hodgson JA with whom Mason P and Giles JA agreed) (‘Transgrid’); John Holland Pty Ltd v Roads & Traffic Authority of New South Wales [2007] NSWCA 19 [38] (Hodgson JA, with whom Beazley and Basten JJA agreed) (‘John Holland’); Plaza West Pty Ltd v Simon’s Earthworks (NSW) Pty Ltd [2008] NSWSC 753 [50] (Hammerschlag J); Hervey Bay (JV) Pty Ltd v Civil Mining and Construction Pty Ltd [2008] QSC 58 (McMurdo J) (‘Hervey Bay’).

The relevant provisions of the Act

The Act was originally enacted in 2002. It was amended by the Building and Construction Industry Security of Payment (Amendment) Act 2006 (‘the Amending Act’).

Part 1 of the Act is entitled ‘Preliminary’. Relevantly, it contains ss 3 and 4. The object of the Act is set out in s 3, which is in the following terms:

(1)The object of this Act is to ensure that any person who undertakes to carry out construction work or who undertakes to supply related goods and services under a construction contract is entitled to receive, and is able to recover, progress payments in relation to the carrying out of that work and the supplying of those goods and services.
(2)The means by which this Act ensures that a person is entitled to receive a progress payment is by granting a statutory entitlement to that payment in accordance with this Act.
(3)The means by which this Act ensures that a person is able to recover a progress payment is by establishing a procedure that involves —
(a)the making of a payment claim by the person claiming payment; and
(b)the provision of a payment schedule by the person by whom the payment is payable; and
(c)the referral of any disputed claim to an adjudicator for determination; and
(d)the payment of the amount of the progress payment determined by the adjudicator; and
(e)the recovery of the progress payment in the event of a failure to pay.

(4) It is intended that this Act does not limit —
(a)any other entitlement that a claimant may have under a construction contract; or
(b)any other remedy that a claimant may have for recovering that other entitlement.

Section 4 contains the following definitions of ‘construction contract’ and ‘progress payment’:

construction contract means a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party. …
progress payment means a payment to which a person is entitled under section 9, and includes (without affecting any such entitlement) —
(a)the final payment for —
(i)construction work carried out under a construction contract, or
(ii) related goods and services supplied under the contract; or

(b)a single or one-off payment for ‑—
(i) construction work carried out under a construction contract; or

(ii) related goods and services supplied under the contract; or
(c)a payment that is based on an event or date (known in the building and construction industry as a ‘milestone payment’).
Note

The amount of a progress payment is calculated in accordance with sections 10, 10A, 10B and 11.

Part 2 of the Act deals with rights to progress payments, and relevantly contains ss 9, 10, 10A, 11(1) and 12. Those provisions are relevantly as follows:

9 Rights to progress payments
(1)On and from each reference date under a construction contract, a person—
(a)who has undertaken to carry out construction work under the contract; or
(b)who has undertaken to supply related goods and services under the contract—

is entitled to a progress payment under this Act, calculated by reference to that date.

…
10 Amount of progress payment
(1)The amount of a progress payment to which a person is entitled in respect of a construction contract is to be—
(a)the amount calculated in accordance with the terms of the contract; or
(b)if the contract makes no express provision with respect to the matter, the amount calculated on the basis of the value of—
(i)construction work carried out or undertaken to be carried out by the person under the contract; or
(ii)related goods and services supplied or undertaken to be supplied by the person under the contract—

as the case requires.

(2)Despite subsection (1) and anything to the contrary in the construction contract, a claimable variation may be taken into account in calculating the amount of a progress payment to which a person is entitled in respect of that construction contract.
(3)Despite subsection (1) and anything to the contrary in the construction contract, an excluded amount must not be taken into account in calculating the amount of a progress payment to which a person is entitled in respect of that construction contract.

10A Claimable variations
(1)This section sets out the classes of variation to a construction contract (the claimable variations) that may be taken into account in calculating the amount of a progress payment to which a person is entitled in respect of that construction contract.
…

(3) The second class of variation is a variation where—
(a)the work has been carried out or the goods and services have been supplied under the construction contract; and
(b)the person for whom the work has been carried out or the goods and services supplied or a person acting for that person under the construction contract requested or directed the carrying out of the work or the supply of the goods and services; and
(c)the parties to the construction contract do not agree as to one or more of the following—
(i)that the doing of the work or the supply of goods and services constitutes a variation to the contract;
(ii)that the person who has undertaken to carry out the work or to supply the goods and services under the construction contract is entitled to a progress payment that includes an amount in respect of the work or the goods and services;
(iii)the value of the amount payable in respect of the work or the goods and services;
(iv)the method of valuing the amount payable in respect of the work or the goods and services;
(v)the time for payment of the amount payable in respect of the work or the goods and services; and

(d)subject to subsection (4), the consideration under the construction contract at the time the contract is entered into—
(i) is $5 000 000 or less; or
(ii)exceeds $5 000 000 but the contract does not provide a method of resolving disputes under the contract (including disputes referred to in paragraph (c)).

(4)If at any time the total amount of claims under a construction contract for the second class of variations exceeds 10% of the consideration under the construction contract at the time the contract is entered into, subsection (3)(d) applies in relation to that construction contract as if any reference to ‘$5 000 000’ were a reference to ‘$150 000’.

Example
A building contractor enters into a construction contract. The consideration (contract sum) under the contract at the time the contract is entered into is $3 million. The contract contains a dispute resolution clause. The contractor undertakes work at the direction of the other party. The contractor claims (the new claim) that the work is a variation to the contract. The other party does not agree that the work constitutes a variation to the contract (disputed variation). The contractor has already made a number of claims for disputed variations under the contract. The new claim brings the total amount of claims for disputed variations under the contract to $350 000. This amount exceeds 10% of the contract sum. As the contract sum exceeds $150 000 and the contract contains a dispute resolution clause, the disputed variation in the new claim and all subsequent disputed variations under the contract will not be claimable variations under this Act.

10B Excluded amounts
(1)This section sets out the classes of amounts (excluded amounts) that must not be taken into account in calculating the amount of a progress payment to which a person is entitled under a construction contract.

(2)       The excluded amounts are —
(a)any amount that relates to a variation of the construction contract that is not a claimable variation;
(b)any amount (other than a claimable variation) claimed under the construction contract for compensation due to the happening of an event including any amount relating to—
(i)        latent conditions; and
(ii)       time-related costs; and
(iii)      changes in regulatory requirements;
(c)any amount claimed for damages for breach of the construction contract or for any other claim for damages arising under or in connection with the contract;
(d)any amount in relation to a claim arising at law other than under the construction contract;
(e)any amount of a class prescribed by the regulations as an excluded amount.

11       Valuation of construction work and related goods and services
(1)Construction work carried out or undertaken to be carried out under a construction contract is to be valued —
(a)       in accordance with the terms of the contract; or
(b)if the contract makes no express provision with respect to the matter, having regard to —
(i)        the contract price for the work; and
(ii)any other rates or prices set out in the contract; and
(iii)if there is a claimable variation, any amount by which the contract price or other rate or price set out in the contract, is to be adjusted as a result of the variation; and
(iv)if any of the work is defective, the estimated cost of rectifying the defect.

…

Division 1 of pt 3 of the Act deals with the procedure for recovering progress payments. Section 14 provides for the making of payment claims by a claimant who claims to be entitled to a progress claim. Section 15 provides for the respondent upon whom a progress claim has been served to reply to the claim by providing a payment schedule. Division 2 of pt 3 provides for the adjudication of disputes. In particular, s 18 relevantly provides for a claimant to make an adjudication application where the respondent provides a payment schedule but the scheduled amount is less than the claimed amount in the payment claim. The section also provides for the form in which an adjudication application must be made. Section 19 deals with the eligibility criteria for adjudicators and s 20 provides for the appointment of an adjudicator. Section 21 deals with adjudication responses by respondents and s 22 with adjudication procedures.

Division 2 also contains ss 23, 45 and 47. Those provisions are as follows:

23Adjudicator's determination
(1) An adjudicator is to determine —
(a)the amount of the progress payment (if any) to be paid by the respondent to the claimant (the adjudicated amount); and
(b)the date on which that amount became or becomes payable; and
(c)the rate of interest payable on that amount in accordance with section 12(2).

Note
The adjudicated amount may be added to under section 45(8).
(2)In determining an adjudication application, the adjudicator must consider the following matters and those matters only —
(a)the provisions of this Act and any regulations made under this Act;
(b)subject to this Act, the provisions of the construction contract from which the application arose;
(c)the payment claim to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the claimant in support of the claim;
(d)the payment schedule (if any) to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the respondent in support of the schedule;
(e)the results of any inspection carried out by the adjudicator of any matter to which the claim relates.

(2A)In determining an adjudication application, the adjudicator must not take into account—
(a) any part of the claimed amount that is an excluded amount; or
(b)any other matter that is prohibited by this Act from being taken into account.

(2B) An adjudicator's determination is void—
(a) to the extent that it has been made in contravention of subsection (2);
(b)if it takes into account any amount or matter referred to in subsection (2A), to the extent that the determination is based on that amount or matter.

(3)The adjudicator's determination must be in writing and must include —
(a) the reasons for the determination; and
(b) the basis on which any amount or date has been decided.
(4)If, in determining an adjudication application, an adjudicator has, in accordance with section 11, determined—
(a)the value of any construction work carried out under a construction contract; or
(b)the value of any related goods and services supplied under a construction contract—

the adjudicator (or any other adjudicator) is, in any subsequent adjudication application that involves the determination of the value of that work or of those goods and services, to give the work or the goods and services the same value as that previously determined unless the claimant or respondent satisfies the adjudicator concerned that the value of the work or the goods and services has changed since the previous determination.

…

45 Adjudicator's and review adjudicator's fees

…

(5)An adjudicator is not entitled to be paid any fees or expenses in connection with the determination of an application if he or she fails to make a decision on the application (otherwise than because the application is withdrawn or the dispute between the claimant and respondent is resolved) within the time allowed by section 22(4) or 28I(10) (as the case requires).

…

47 Effect of Part on civil proceedings

(1)Subject to section 48, nothing in this Part affects any right that a party to a construction contract —
(a) may have under the contract; or
(b) may have under Part 2 in respect of the contract; or
(c) may have apart from this Act in respect of anything done or omitted to be done under the contract.
(2)Nothing done under or for the purposes of this Part affects any proceedings arising under a construction contract (including any arbitration proceedings or other dispute resolution proceedings), whether under this Part or otherwise, except as provided by subsections (3) and (4).
(3)In any proceedings before a court or tribunal in relation to any matter arising under a construction contract, the court or tribunal—
(a)must allow for any amount paid to a party to the contract under or for the purposes of this Part in any order, determination or award it makes in those proceedings; and
(b)may make such orders as it considers appropriate for the restitution of any amount so paid, and such other orders as it considers appropriate, having regard to its decision in those proceedings.

(4)In any arbitration proceedings or other dispute resolution proceedings under the construction contract, the person determining the arbitration or dispute must allow for any amount paid to a party to the contract under or for the purposes of this Part in any order or determination or award the person makes in those proceedings.
(5)Nothing in this Part affects any right that a principal may have under any contract except as expressly provided for in this Act.

Section 48 of the Act precludes contracting out of the Act. It does so by declaring to be void any contractual provision which excludes, modifies or restricts the operation of the Act, or has that effect. Section 48 provides:

No contracting out
(1)The provisions of this Act have effect despite any provision to the contrary in any contract.

(2) A provision of any agreement, whether in writing or not —
(a)under which the operation of this Act is, or is purported to be, excluded, modified or restricted, or that has the effect of excluding, modifying or restricting the operation of this Act; or
(b)that may reasonably be construed as an attempt to deter a person from taking action under this Act —

is void.

Relevant provisions of the contract

Payment of provisional sums

Clause 1 of the contract contains relevant definitions, including:

directionincludes agreement, approval, assessment, authorisation, certificate, decision, demand, determination, explanation, instruction, notice, order, permission, rejection, request or requirement;

Clause 3 of the contract provides for payment of provisional sums:

3 Provisional sums
A provisional sum included in the Contract shall not itself be payable to the Principal but where pursuant to a direction the work or item to which the provisional sum relates is carried out or supplied by the Contractor, the work or item shall be priced by the Superintendent, and the difference shall be added to or deducted from the contract sum.
Where any part of such work or item is carried out or supplied by a subcontractor, the Superintendent shall allow the amount payable by the Contractor to the subcontractor for the work or item, disregarding:
(a)any damages payable by the Contractor to the subcontractor or vice versa; and

(b) any deduction of cash discount for prompt payment,
plus an amount for profit and attendance calculated by using the percentage thereon stated in Item 13 or elsewhere in the Contract, or, if not so stated, as assessed by the Superintendent.

Variations

Clauses 36.1, 36.2, 36.2A, 36.2B and 36.3 provide as follows:

36       Variations
36.1     Directing variations
The Contractor shall not vary WUC except as directed in writing by the Superintendent in a written variation order.
The Superintendent, before the date of practical completion, may direct the Contractor to vary WUC by any one or more of the following which is nevertheless of a character and extent contemplated by, and capable of being carried out under, the provisions of the Contract (including being within the warranties in subclause 2.2):
(a)       increase, decrease or omit any pan;
(b)       change the character or quality;
(c)       change the levels, lines, positions or dimensions;
(d)      carry out additional work;
(e) demolish or remove material or work no longer required by the Principal.

The items referred to above do not constitute a variation if, in the reasonable opinion of the Superintendent, such items already form part of WUC or arise out of the completion of the development of the design or documentation of the Works or is required due to the inaccuracy or inadequacy of, or an error in the design or documentation of the Works.
No variation, either alone or in combination with other variations, will invalidate this Contract. Subject to this clause 36, the Principal's entitlement to direct a variation is unlimited and is not subject to any restriction otherwise at law including the restrictions as to the nature, extent, value or timing of the variation which may be directed.
36.2 Proposed variations
The Superintendent may give the Contractor written notice of a proposed variation.
The Contractor shall, within the time directed by the Superintendent in the notice, or if no time is directed in the notice, within 7 days, notify the Superintendent whether the proposed variation can be effected, together with, if it can be effected, the Contractor's estimate of the:
(a)effect on the approved program (including the date for practical completion); and
(b)cost (including all warranties and time-related costs, if any) of the proposed variation.

The Superintendent may direct the Contractor to give a detailed quotation for the proposed variation supported by measurements or other evidence of cost or other information that the Superintendent considers necessary or any other information which is requested by any Tenant. The Contractor must provide the information requested to the Superintendent within the time and in the form requested by the Superintendent.
The Contractor's costs for each compliance with this subclause may be certified by the Superintendent as moneys due to the Contractor.
Upon receipt of the Contractor's estimate under this subclause, the Superintendent may either:
(c)issue a written variation order and the variation will then be valued under subclause 36.4; or

(d)      advise that it does not wish to proceed with the variation.
36.2A Directions constituting a variation
If the Contractor considers that any direction from the Superintendent or the Principal which is not expressly identified as a variation order constitutes a variation it must give notice to the Superintendent within 7 days of receiving that direction.
Following receipt of a notice under this subclause, the Superintendent must promptly issue a direction advising whether or not the subject direction gives rise to a variation. If it is a variation, subclauses 36.2, 36.2B and 36.4 shall apply.
The Contractor acknowledges and agrees that it is not entitled to any additional cost or expense, any adjustment to the contract sum, any EOT or to any claim otherwise at law in relation to any direction not expressly identified as a variation order if it fails to strictly comply with the notice requirements set out in this subclause 36.2A.
36.2B   Contractor must not commence without a written variation order
Except in the case of an emergency, the Contractor must not commence work in respect of a variation without having first obtained a written variation order for that variation from the Superintendent.
36.3     Variations for convenience of Contractor
If the Contractor requests the Superintendent to direct a variation for the convenience of the Contractor, the Superintendent may do so. The direction shall be written and may be conditional.
The Superintendent shall not be obliged to approve a variation for the convenience of the Contractor.
The Contractor acknowledges and agrees that it is not entitled to any additional cost or expense, any adjustment to the contract sum, any EOT or to any claim otherwise at Law in relation to a variation for the convenience of the Contractor.

Clause 36.4 of the contract provides for pricing:

36.4     Pricing
Other than to the extent a variation relates to the Coles works which shall be dealt with in accordance with Annexure Part HH, where the Contract provides that a valuation shall be made under this subclause 36.4, the Principal shall pay or allow the Contractor or the Contractor shall pay or allow the Principal, as the case may require, an amount ascertained by the Superintendent and certified in a relevant progress certificate using the following order of precedence:
(a)       Prior agreement;
(b)       Applicable rates or prices in the Contract;
(c)Rates or prices in a schedule of rates or schedule of prices, even though not Contract documents, to the extent that it is reasonable to use them; and
(d)Reasonable rates or prices, which shall include the amount for profit and overheads specified at Item 32A,

and any deductions shall include a reasonable amount for profit specified at Item 32B but not overheads.
That price shall be added to or deducted from the contract sum.

Progress Claims

Clause 37.1 of the contract provides for progress claims:

37.1 Progress claims
The parties agree that the percentages of the contract sum and amounts payable are as follows:

Name of stage % of total contract sum $

Not applicable Payments are to be made monthly in response to the Contractor’s claims for payment, pursuant to subclause 37.1 As determined by the Superintendent As certified by the Superintendent

The Contractor shall claim payment progressively in accordance with Item 33 (each date being a ‘reference date’ for the purposes of the SOP Act).
An early progress claim shall be deemed to have been provided on the last day of the relevant month in which the progress claim is submitted.
Except where included in an amount assessed or otherwise approved by the Superintendent under the Contract, the amount claimed by the Contractor must not include any excluded amount.
Each progress claim shall be given in writing to the Superintendent and shall set out, or include as a separate document, as a minimum details of the following:
(a) The value of WUC done;
(b)The total of all adjustments to the contract sum certified by the Superintendent;

(c) The total amount payable for off-site or unfixed materials;
(d)The total amount of all payments paid to the Contractor by the Principal prior to the date of the progress claim;

(e) The value of work to complete WUC; and
(f) Projected cashflow and projected final contract sum.
The Superintendent may request further information from the Contractor in respect of any progress claim. The Contractor shall provide the information requested to the Superintendent within the time and in the form requested by the Superintendent.

Clause 37.2 of the contract provides the definition of ‘progress certificate’:

37.2 Certificates
The Superintendent shall, within 10 business days after receiving such a progress claim, issue to the Principal and the Contractor a progress certificate identifying the progress claim to which it relates, the value of WUC completed and stating the amount of payment which in the Superintendent's opinion is to be made by the Principal to the Contractor or the Contractor to the Principal (progress certificate). The progress certificate must set out the calculations employed to arrive at that amount and, if the amount is more or less than the amount claimed by the Contractor the reasons for the difference (including, in the case where the difference is due to the withholding of payment, the reasons for the withholding of payment). The Superintendent must also identify in the progress certificate any amount of the progress claim that the Superintendent (as agent for the Principal) alleges is an excluded amount (other than an excluded amount permitted under subclause 37.1). The Superintendent shall allow in any progress certificate the Superintendent's assessment of retention moneys and moneys due from the Contractor to the Principal pursuant to the Contract. If the Contractor does not make a progress claim in accordance with Item 33, the Superintendent may nonetheless issue the progress certificate with details of the calculations.
Subject to the Principal's right to set-off in clause 37.7, within 14 days after receiving the progress certificate, or within 28 days after the Superintendent receives the progress claim, whichever is the later, the Principal shall pay to the Contractor or the Contractor shall pay to the Principal, as the case may be, the amount not less than that shown in the progress certificate as due to the Contractor or to the Principal as the case may be, provided that if an amount is in dispute, the Principal need only pay the undisputed portion of the amount certified in the progress certificate.
Neither a progress certificate nor a payment of moneys shall be evidence that the subject WUC has been carried out satisfactorily. Payment other than final payment shall be payment on account only.

Clause 42 of the contract provides for dispute resolution:

42       Dispute Resolution
42.1A Acknowledgement
The parties acknowledge and agree that the process set out in clause 42 is a method for resolving disputes under the Contract for the purposes of section 10A(3)(d) of the SOP Act.
42.1     Notice of dispute
If a difference or dispute (together called a ‘dispute’) between the parties arises in connection with the subject matter of the Contract, including a dispute concerning:
(a)       a Superintendent’s direction; or
(b)       a claim made otherwise at law under the law governing the Contract:
then either party shall, by hand or by registered post, give the other and the Superintendent a written notice of dispute adequately identifying and providing details of the dispute.
Notwithstanding the existence of a dispute, the parties shall, subject to clauses 39 and 40 and subclause 42.4, continue to perform the Contract.
42.2     Conference
(a)If a party delivers a notice of dispute to the other party, then within 10 business days of the date on which the other party receives the notice of dispute, senior representatives of the parties at Project level must meet and use reasonable endeavours acting in good faith to resolve the dispute by joint discussions.
(b)If the dispute has not been resolved within 28 days of service of the notice of dispute, that dispute shall be and is hereby referred to mediation.

42.3A Mediation
If within a further 14 days of the dispute being referred to mediation the parties have not agreed upon a mediator, the mediator shall be nominated by the person in Item 37A.
The party issuing the notice of dispute shall be responsible for convening and organising the mediation.
The mediation shall be conducted on the following basis:
(c)the mediation is to be conducted in accordance with the Institute of Arbitrators and Mediators Australia’s Rules for the Mediation of Commercial Disputes; and
(d)each of the parties must pay an equal share of the fees and expenses the mediator is entitled to and any room hire charges.

If the dispute has not been resolved by mediation or is not otherwise resolved within 56 days of service of the notice of dispute, either party may pursue its rights at law.

The purpose of the Act

When it was originally enacted, the Act was modelled on the provisions and processes set out in the New South Wales Building and Construction Industry Security of Payment Act 1999 (‘the NSW Act’). In Amflo Constructions Pty Ltd v Jefferies,[22] Campbell J described the basic economy of the NSW Act as follows:

A fundamental feature of the legislation is that, apart from the fact that parties to a construction contract cannot contract out of the rights given by the legislation … nothing in Part 3 of the Act … affects any of the rights that parties to a construction contract have … . The concern of the Act is with maintaining the cash flow of claimants, by enabling them to recover quickly amounts which the adjudication process says they are entitled to. It is possible for the person who pays the amount of money which an adjudication has found due to seek to reclaim that money, in court proceedings which decide what the ultimate legal rights of the parties are. An evident purpose of the Act is that, if there is to be such litigation, it will start from a position where the claimant has been paid the amount which the adjudication process has decided should be paid.[23]

[22][2003] NSWSC 856.

[23]Ibid [25].

In Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd,[24] McDougall J said of the NSW Act:

The Security of Payment Act operates to alter, in a fundamental way, the incidence of the risk of insolvency during the life of a construction contract. As Keane JA said, of the not dissimilar Queensland statute, the Building and Construction Industry Payments Act 2004 (Qld), in RJ Neller Building P/L v Ainsworth, the statute ‘seeks to preserve the cash flow to a builder notwithstanding the risk that the builder might ultimately be required to refund the cash in circumstances where the builder’s ... inability to repay could be expected to eventuate’. It followed, his Honour said, that the risk of inability to repay, in the event of successful action by the other party, must be regarded as one that the legislature has assigned to that other party. The same is true of the regime established by the Security of Payment Act.
Further, the Security of Payment Act operates in a way that has been described as ‘rough and ready’ or, less kindly, as ‘Draconian’. It imposes a mandatory regime regardless of the parties’ contract: s 34. It provides extremely abbreviated time frames for the exchange of payment claims, payment schedules, adjudication applications and adjudication responses. It provides a very limited time for adjudicators to make their decisions on what, experience shows, are often extremely complex claims involving very substantial volumes of documents (see, for example, my decision in Laing O’Rourke Australia Construction v H&M Engineering and Construction).
The Security of Payment Act gives very valuable, and commercially important, advantages to builders and subcontractors. At each stage of the regime for enforcement of the statutory right to progress payments, the Security of Payment Act lays down clear specifications of time and other requirements to be observed. It is not difficult to understand that the availability of those rights should depend on strict observance of the statutory requirements that are involved in their creation.
Further, not only are adjudication determinations capable of transmutation into judgments of a court of competent jurisdiction (s 25), they create issue estoppels (Dualcorp Pty Ltd v Remo Constructions Pty Ltd). Why should a respondent to a payment claim be put at risk of suffering a judgment, and of being estopped from contesting that judgment in relation to later payment claims or adjudication applications, where the claimant has not complied with a temporal limitation for the making of the adjudication application on which the determination that gives rise to the judgment and the estoppel is founded?[25]

[24](2010) 78 NSWLR 393.

[25]Ibid 437–8 [207]–[211] (citations omitted). Section 34 of the NSW Act corresponds with s 48 of the Act. Section 25 of the NSW Act broadly corresponds with s 28R of the Act.

In Saville v Hallmarc Construction Pty Ltd,[26] Warren CJ and Tate JA (with whom Kaye JA agreed) considered what McDougall J had said, and, agreeing with it, summarised it as follows:

(1)[the Act] operates in a ‘rough and ready’ way to preserve the cash flow to a builder notwithstanding that the builder might ultimately be required to refund the money received and yet have an inability to repay;
(2)it imposes a mandatory regime regardless of the parties’ contract with extremely abbreviated time frames for the exchange of payment claims, payment schedules, adjudication applications and adjudication responses;
(3)at each stage of the regime for enforcement of the statutory right to progress payments, it lays down clear specifications of time and other requirements to be observed, rendering it not difficult to understand ‘that the availability of those rights should depend on strict observance of the statutory requirements that are involved in their creation’;
(4)as adjudication determinations are capable of being filed as a judgment for debt in a court of competent jurisdiction, a respondent to a payment claim should not be at risk of suffering a judgment where a temporal limitation has not been complied with by the claimant;
(5)a claimant has alternative remedies; ‘even if the door to adjudication is closed, the door to judgment remains open’.[27]

[26][2015] VSCA 318.

[27]Ibid [80] (citations omitted).

Does the contract contain a method for resolving disputes?

The only relevant provision is cl 42. Accordingly, the question becomes whether cl 42 provides a ‘method of resolving disputes’ under the contract within the meaning of s 10A(3)(d)(ii) of the Act. There can be no doubt that, if a dispute arises between the parties, they are obliged to deploy the procedures described in cl 42 in order to resolve it. The Court is faced with an expression used in a statute and, in order to determine the meaning the statute gives it, both parties accepted that it is necessary to apply the accepted techniques of statutory construction.

It will be noticed that the expression applies to identify a quite limited context. Generally speaking, where a construction contract has a consideration that exceeds $5,000,000, the parties are left to their own devices. The Act assumes that the parties will have made arrangements in relation to progress payments for variations that are not required to be supplemented by statute. Where the consideration exceeds $5,000,000 and there are no such arrangements, the legislation supplies what is missing.

By itself, the expression ‘dispute resolution’ may be understood to be confined to methods that result in the determination (by a third party) of a dispute. The phrase ‘alternative dispute resolution’ is a broader term, which is commonly understood to include mediation, as well as arbitration. However, that is not the phrase used in the statute. The language used in the statute refers to a ‘method of resolving disputes under the contract’. In our opinion, the meaning of ‘method of resolving disputes’ requires a method that will result in an actual resolution of the dispute, rather than just offering a forum for the discussion of the controversies between the parties, which may or may not lead to their resolution. The word used is ‘resolving’, not ‘addressing’.

Given the controversy between the parties, it is hardly surprising that the provision itself does not readily indicate the meaning of the expressions it uses. Accordingly, it becomes necessary to consider, first, provisions adjacent to s 10A(3)(d)(ii) and, then, other provisions in the Act itself.

None of the provisions adjacent to s 10A(3)(d)(ii) are of assistance. However, s 1 of the Act describes its main purpose as being ‘to provide for entitlements to progress payments for persons who carry out construction work … under construction contracts’. As indicated at [36] above, s 3 identifies the objects of the Act. Those objects are repeatedly expressed in terms of entitlement. Thus, s 3(1) refers to ensuring ‘that any person … is entitled to receive’; and s 3(2) speaks of ensuring ‘that a person is entitled to receive a progress payment’. Section 3(4) of the Act (which was introduced by the Amending Act), also speaks in terms of entitlement. It uses in (a) the expression ‘any other entitlement’, and in (b) ‘for recovering that other entitlement’. Depriving parties to a construction contract of the advantages conferred by the Act if they have nothing more than a forum in which they might or might not agree to bring their dispute to a resolution falls short of giving rise to the entitlements that the Act intends to create. In our opinion, the entitlements contemplated by the legislation are not achieved if the method of resolving disputes is confined to methods, such as mediation,[28] that may not result in their resolution.
[28]During the second reading speech, the Minister for Planning said the Amending Act would ‘amend the Building and Construction Industry Security of Payment Act 2002 to make it more effective in enabling any person who carries out building or construction work to promptly recover progress payments’: Victoria, Parliamentary Debates, Legislative Assembly, 9 February 2006, 219–21 (Rob Hulls, Minister for Planning).

This construction of the legislation appears to be borne out by its context.[29] The Act exists to solve a problem.[30] That problem is evident when one considers the ‘purpose’ in s 1 and ‘objects’ in s 3. Access to ‘progress payments’ was notoriously insecure. The provision of a means to ensure entitlements to progress payments for persons who carry out construction work arises from the fact that, when the matter was simply left to the parties, those who carried out construction work did not have a means of securing progress payments. The scope for dispute about variations, and, in particular, whether a particular ‘variation’ is in, in truth, ‘a change in the scope of the construction work to be carried out ... under the contact’,[31] and, thus, the scope for dispute about withholding of payments in respect of variations is self-evident. Accordingly, a construction of the provisions of the Act that conduces to the identification and resolution of disputes regarding progress payments for variations is to be preferred. Such a construction is not met by treating a provision in a contract for variations that may not result in a resolution of a dispute as a ‘means for resolving disputes’.
[29]See CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384, 408.
[30]Brirek Industries Pty Ltd v McKenzie Group Consulting (Vic) Pty Ltd [2014] VSCA 165 [108] (Redlich, Whelan and Santamaria JJA).
[31]See the definition of ‘variation’ in s 4 of the Act.

Finally, the jurisdiction of the adjudicator further reveals the purpose of the Act. Section 9 of the Act establishes a statutory right to progress payments. Section 10 identifies the amount of the progress payments to which s 9 has created the statutory entitlement. Section 14 of the Act provides for payment claims to be served on persons liable to make progress payments. Section 15 provides for payment schedules pursuant to which the person upon whom a payment claim has been served effectively provides their response to the payment claim. In the payment schedule, the recipient identifies the ‘scheduled amount’ which is the amount they propose to pay to the claimant. Division 2 of pt 3 provides for the adjudication of disputes. Section 23 is at the heart of div 2; it provides for the adjudicator to determine the ‘adjudicated amount’. As is plain, the provisions of the Act provide for the making of claims, for responses to them, and, in the case of dispute, their adjudication by an independent third party. It is not open to parties to construction contracts to contract out of the provisions of the Act. The adjudicated amount becomes a statutory entitlement.[32] There are cases where the variation provisions of the Act do not apply: where the contract consideration exceeds $5,000,000 and the parties to such a contract have provided their own method for resolving disputes. The exception should be construed on the basis that it provides the same degree of certainty that is achieved by the other provisions of the Act. In other words, the exception should be construed in such a way that it contemplates an alternative means of securing the certainty and finality of a binding amount. A contractual clause that does no more than require the parties to mediate will not have that effect.
[32]Sections 3(2) and 28M of the Act.

In their written submissions, each of the parties referred to aspects of the second reading speech in relation to the Amending Act. SSC referred to some remarks of the relevant Minister (in the Legislative Council) in respect of the proposed amendment giving rise to the exception:

Disputed variations on large contracts, initiated by building owners and big contractors will be exempt from the scheme. This addresses the concern that such disputes on major contracts should not be subject to the security of payment scheme and the normal contract methods of dispute resolution should continue to apply.[33]

[33]Victoria, Parliamentary Debates, Legislative Council, 15 June 2006, 2420 (Marsha Rose Thomson, Minister for Consumer Affairs).

In its submissions, Construction Engineering referred to the second reading speech (in the Legislative Assembly) in which the Minister for Planning said:

Disputed variations will be excluded where the contract provides a mechanism for determining whether there is an entitlement to be paid for a variation and for determining the quantum and due date for such payment. These changes are aimed at avoiding uncertainties that have been experienced in other jurisdictions.[34]

[34]Victoria, Parliamentary Debates, Legislative Assembly, 9 February 2006, 219 (Rob Hulls, Minister for Planning).

In our opinion, the remarks of the Minister for Planning reflect what we have considered to be the purpose of the Act and that of the exception established in s 10A. That purpose is to provide or to ensure that the parties have available to them a means of finally determining an entitlement to a progress payment.

As indicated at [48] above, cl 42 of the contract contains an acknowledgement and agreement ‘that the process set out in cl 42 is a method for resolving disputes under the Contract for the purposes of s 10A(3)(d)’ of the Act. This part of cl 42 can be ignored. Constructively, it amounts to an agreement to contract out of the provisions of the Act. Pursuant to s 48(2) of the Act, it is void.

In our opinion, the primary judge was correct in holding that cl 42 of the contract did not answer the description given in s 10A(3)(d)(ii) of the Act.

Is the adjudicator bound to adopt the superintendent’s pricing?

As indicated above, the consideration under the contract is approximately $34 million, which is defined as the ‘contract sum’.[35] Clause 3 of the contract provides for the superintendent to price provisional sums.[36] Clause 36.4 provides for the superintendent to price variations.[37]
[35]Item 6A of Annexure Part A.
[36]See [43] above.
[37]See [45] above. Clause 1 provides that ‘variation’ has the meaning in cl 36.

Clause 37.1 of the contract relates to progress claims. It provides that the parties agree that the percentages of the contract sum and amounts payable were to be ‘[a]s certified by the Superintendent’.

As indicated at [38] above, s 10(1)(a) of the Act provides that the amount of a progress payment to which a person is entitled is to be ‘the amount calculated in accordance with the terms of the contract’. Similarly, s 11(1)(a) provides that work carried out under a construction contract is to be valued ‘in accordance with the terms of the contract’.

In the present case, the superintendent priced various items of work pursuant to both cl 3 and cl 36.4 of the contract. Some of that work was the subject of controversy before the adjudicator. In those cases, the adjudicator gave a higher value in respect of the provisional sums and variations than they had been priced by the superintendent.

Before the trial judge, the issue arose whether, by reason of s 11(1)(a) of the Act, which enjoins an adjudicator to value work ‘in accordance with the terms of the contract’, the adjudicator was obliged to adopt the price that had been certified by the superintendent. The trial judge said:

An invitation for an adjudicator to merely adopt a superintendent’s certificate, without more, is not a contractual provision of the kind contemplated by s 11(1)(a) of the Act. It does not provide any means or basis upon which an adjudicator may independently undertake the valuation exercise, but rather delegates that task ex post facto to the contractually appointed superintendent. Such an exercise is not countenanced by the sub‑section.
Further, the mere adoption of a superintendent’s certificate, without more, would be inconsistent with the adjudicator’s statutory task of independently assessing the evidence of value. Even if the pricing mechanism under the construction contract could be interpreted as an invitation to an adjudicator to merely adopt and apply the superintendent’s ‘price’ as evidenced by a certificate issued, such a contractual provision would, in my opinion, be void pursuant to s 48 of the Act as being a contractual provision which serves to exclude, modify or restrict the operation of the Act, or has that effect.[38]

[38]Reasons [115]–[116].

As indicated at [30] above, SSC has contended that the adjudicator was not at large in making his own valuations and calculations. It contended that he was required by s 11(1)(b) and s 23(2) to have regard to the ‘contract price’ in valuing the relevant work. It was not open, SSC contended, to the adjudicator to give the same work a higher value than the price given to it by the superintendent.

For its part, Construction Engineering contended that Parliament intended the provisions of the Act to have primacy over the provisions of the construction contract. Construction Engineering submitted that an adjudicator is not bound by any ‘provision of any agreement’, which excludes, modifies, or restricts the adjudicator’s task to determine the amount of progress payments. Any such provision is void: s 48(2).

Analysis

In the present case, the parties were agreed that the contract had made no express provision in respect of the construction work that was to be valued. Accordingly, the matter fell to be adjudicated under s 11(1)(b) of the Act.[39] In the circumstances, SSC’s contention that the adjudicator under the contract does not have a role reviewing decisions made by the superintendent which affect price misses the point. In truth, the adjudicator has no role ‘under the contract’; the role of the adjudicator is strictly statutory. The issue is not what is provided for in the contract, but what is provided for in the Act. Under the Act, where no express provision has been made in the contract for the valuation of construction work to be carried out, s 11(1)(b) provides that the adjudication is to be carried out by the adjudicator, and that in doing so, the adjudicator must have regard to certain stipulated matters including ‘the contract price for the work’.[40] The obligation to ‘have regard’ to the contract price cannot be understood to mean that the adjudicator is bound by the contract price. Apart from anything else, the Act enjoins the adjudicator to ‘have regard’ to considerations in addition to the ‘contract price for the work’.[41]
[39]Further, SSC had not challenged the finding of the primary judge that the contract had made no express provision with respect to the valuation of progress claims for the purposes of s 11(1)(a): ibid [115]–[117].
[40]Section 11(1)(b)(i) of the Act.
[41]Sections 11(1)(b)(ii)–11(1)(b)(iv) of the Act.

During the argument, a question arose whether an adjudicator may take into account considerations additional to the four considerations stipulated in s 11(1)(b). It is unnecessary to answer that question but, given that the adjudicator is required to carry out a valuation, it is unlikely that he or she will be constrained to have regard only to those four considerations.

Moreover, the valuations provided for in the Act govern only the issue of statutory entitlements. In a sense, they are interim only and, if at the end of the day, they are found to have exceeded the contractual entitlement, a court must make allowance and, if necessary, order restitution[42] and an arbitrator must make allowance.[43] In John Holland Pty Ltd v Roads and Traffic Authority of New South Wales,[44] Giles JA (with whom Tobias and McColl JJA agreed) said:

Any liability arising under the Act, whether prior to or by virtue of a determination or translated into a judgment, has been described as an interim progress payment on account (Brodyn Pty Ltd v Davenport), and in Multiplex Constructions Pty Ltd v Luikens Palmer J spoke of the scheme of the Act as ‘pay now, argue later’. There are many cases in which this has been recognised. In Brodyn Pty Ltd v Davenport Hodgson JA, Mason P and I agreeing, said: ‑
‘The Act discloses a legislative intention to give an entitlement to progress payments, and to provide a mechanism to ensure that disputes concerning the amount of such payments are resolved with the minimum of delay. The payments themselves are only payments on account of a liability that will be finally determined otherwise: ss 3(4), 32. The procedure contemplates a minimum of opportunity for court involvement: ss 3(3), 25(4).’[45]

[42]Section 47(3) of the Act.

[43]Section 47(4) of the Act.

[44](2007) 23 BLC 434 (Giles, Tobias and McColl JJA).

[45]Ibid 443 [44] (citations omitted). See also, Protectavale Pty Ltd v K2K Pty Ltd [2008] FCA 1248 [7] (Finkelstein J); Pearl Hill Pty Ltd v Concorp Construction Group (Vic) Pty Ltd (2011) 32 VR 247, 253 [27] (Hargrave AJA with whom Tate JA agreed).

The ‘pay now’ is a reference to the payment mandated by the Act. The ‘argue later’ refers to disputes about contractual entitlements, including whether they should be affected by set offs etc.

In contending that the adjudicator was bound by the superintendent’s pricing, SSC relied on the decision of this Court in Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd.[46] In that case, it was decided that, as a matter of contract, it was open to the parties to provide that the price of work would be that determined by a third party such as an architect or a superintendent. In such a case, provided the superintendent has complied with the contract in providing the certificate, it can be said that the price determined by the superintendent is ‘final’. But the proviso is not without significance.
[46](2013) 41 VR 636.

In each case, the terms of the contract must be examined. One provision in a contract may provide for pricing by a superintendent. But other provisions may permit a party to challenge that pricing by invoking any relevant dispute resolution provision. Clause 42 provides for dispute resolution. Clause 42.1 provides that the subject matter of a notice of dispute includes disputes ‘concerning (a) a Superintendent’s direction’. Clause 42 itself provides that, so long as the procedures it mandates have been followed, disputes are justiciable. While it can be accepted that a court may be confined to determining whether a superintendent’s certificate has been issued in compliance with the contract, it cannot be said that, where there is the potential for such a dispute, the certificate is ‘final’ when it is made.[47]
[47]It was explained to the Court that, in the present contract, some of the superintendent’s pricing had been the subject of dispute.

As indicated above, Construction Engineering referred the Court to several decisions in which courts in New South Wales had considered the provisions of the legislation in that State corresponding to the Act. Despite an invitation of the Court to do so, SSC declined to address these cases in any detail. SSC said that each of the cases addressed functions of a superintendent or equivalent person performing functions other than the circumstance where ‘the adjudicator’s determination is speaking to an item of work which informs the contract price’. However, when it is recognised that a superintendent’s certificate as to the price of provisional sums and variations is not immune from the dispute resolution provisions, the distinction that SSC sought to draw between the functions of the superintendent is not of significance.

In Abacus Funds Management Ltd v Davenport,[48] the Supreme Court of New South Wales (McDougall J) considered a progress claim that had been submitted for adjudication under the NSW Act. The adjudicator made an assessment of value that differed from the price which had been determined by the architect. The owner contended that where there was a contractual mechanism that provided for an architect (or some person fulfilling the role of the architect) to certify the amount of a progress claim, the only entitlement of the builder was to the progress claim so certified and that an adjudicator under the legislation had no power to re-evaluate the architect’s certification. McDougall J rejected the argument. He said:

Clause 10 of the contract deals with payment and adjustment of the contract sum. Clause 10.01 provides for the making of progress claims. Clause 10.02 provides for the issue (by the architect) of progress certificates. Clause 10.07 provides that, in effect, the builder’s entitlement is to be paid, as a progress payment, ‘the amount specified by that certificate’.
It cannot be correct to say that an adjudicator under the [NSW] Act is bound by the terms of any progress certificate issued, under a contractual regime of the kind that I have described, by the architect or someone in the position of the architect. That would mean that an adjudicator could not make a determination that was inconsistent with a certificate that was (for example) manifestly wrong. Indeed, it would mean that an adjudicator could not make a determination that was inconsistent with a certificate that had been issued in bad faith, or as the result of fraudulent collusion to the disadvantage of the builder

Further, as was submitted for [the builder], it is not uncommon for building contracts to provide that it is the proprietor, or someone who is the proprietor’s alter ego or agent, to occupy the certifying role that, under the form of contract presently under consideration, is occupied by the architect. In those circumstances, if the submission for [the owner] be correct, an adjudicator would be bound by a certificate issued by a proprietor, or by its agent or alter ego, in bad faith, or one that flatly and obviously disregarded the rights of the builder.
Such a construction would undermine in a very serious way the evident intention of the legislature that is embodied in the [NSW] Act. It would enable an unscrupulous proprietor (either by itself, if the contract so permitted, or with the collusion of an unscrupulous certifier) to set at nought the entitlement to progress payments that the [NSW] Act provides and protects.
I do not think that the construction advocated by [the owner] is required by the [NSW] Act. It is correct to say that the amount of a progress payment is to be ‘the amount calculated in accordance with the terms of the contract’ where the contract makes provision for that matter (s 9(a)). It is equally correct to say that construction work is to be valued ‘in accordance with the terms of the contract’ where the contract makes provision for that matter (s 10(1)(a)). However, a reference to calculation or valuation ‘in accordance with the terms of the contract’ is a reference to the contractual mechanism for determination of that which is to be calculated or valued, not to the person who, under the contract, is to make that calculation or valuation. In the present case, it means that [the adjudicator] was bound to calculate the progress payment in accordance with cl 10.02 of the contract. It does not mean that [the adjudicator] was bound by the architect’s earlier performance (or attempted or purported performance) of that task.
In the present case, what [the adjudicator] was required to do was to undertake for himself the task that the architect had purported to undertake. He was not required simply and only to apply his rubber stamp and initials to the results of the architect’s labours.[49]

[48][2003] NSWSC 1027 (McDougall J).

[49]Abacus Funds Management Ltd v Davenport [2003] NSWSC 1027 [34]–[39]. Section 9(a) of the NSW Act corresponds with s 10(1)(a) and (b) of the Act. Section 10(1)(a) of the NSW Act corresponds with s 11(1)(a) of the Act.

In Transgrid, the NSW Court of Appeal expressed provisional agreement with the reasons of McDougall J. Hodgson JA said:

Accordingly, it is not necessary to decide whether, on the true construction of s 9(a) and the contract, the amount ‘calculated in accordance with the terms of the contract’ is the amount certified (cl 42.2 of the contract) or the value of the work less deductions (cl 42.3 of the contract). However I would express the view that the latter follows from what I think is a preferable interpretation of s 9(a) and the contract, consistent with the use of the word ‘calculation’ and consistent with the provisions against contracting out (s 34); that is, on this matter, I prefer the view of McDougall J in Abacus v Davenport to that tentatively expressed by the Master in the present case.[50]

[50]Transgrid (2004) 61 NSWLR 521, 542 [35].

In John Holland, Hodgson JA (with whom Beazley and Basten JJA agreed) said:

I note that in Transgrid v Siemens Limited, I expressed the view (obiter) to the effect that ‘calculated in accordance with the terms of the contract’ meant calculated on the criteria established by the contract, and did not mean reached according to mechanisms provided by the contract; and I adhere to that view as being more in accord with the use of the word ‘calculated’ and with the prohibition in s 34 of the [NSW] Act on contracting out of the effect of the [NSW] Act. On the other view, contractual provisions denying progress payments for construction work otherwise than as certified by a superintendent or in accordance with review procedure provided by the contract could in my opinion have the effect of restricting the operation of the Act, and thus be made void by s 34. I do not think the legislature intended to make such usual provisions void. That obiter view is not directly relevant to the issue now under consideration; but the circumstance that the weight of authority was against [the principal’s] submission has some indirect relevance, as indicated below.[51]

[51]John Holland [2007] NSWCA 19 [38] (citations omitted).

In the same case, Basten JA said:

A further factor which gives support to the conclusion set out above is that … Part 2 of the [NSW Act], and in particular the right to a progress payment conferred by s 8 and the calculation of the amount in accordance with ss 9 and 10, suggest that the statutory right to payment is unaffected by calculations undertaken by a superintendent or other authority appointed to value work under the contract. In other words, the statutory regime is, partly, though not of course wholly, independent of the terms of the construction contract and is intended to operate according to its own statutory terms: see the prohibition on contracting out in s 34.[52]

[52]Ibid [77].

In Plaza West Pty Ltd v Simon’s Earthworks (NSW) Pty Ltd,[53] Hammerschlag J said that he considered the statements of Hodgson JA and Basten JA in John Holland ‘to be entirely correct’.[54] In Hervey Bay, the Supreme Court of Queensland (McMurdo J) construed the corresponding provisions contained in the Building and Construction Industry Payments Act 2004 (Qld). McMurdo J followed the earlier decisions in Transgrid and John Holland.[55]
[53][2008] NSWSC 753.
[54]Ibid [52].
[55]Hervey Bay [2008] QSC 58 [24].

We agree with the thrust of each of these decisions. Under s 23 of the Act, the adjudicator is required ‘to determine’ the amount of a progress payment. In making that determination, the adjudicator must consider the matters set out in s 23(2), and only those matters. Requiring an adjudicator to adopt a price stipulated by the superintendent is inconsistent with the making of the determination required by the Act. Moreover, the provisions of the Act prevail over those in the contract. Were it otherwise, s 48(2) would be rendered ineffective. In our opinion, the trial judge was correct to observe that ‘the mere adoption of the superintendent’s certificate, without more, would be inconsistent with the adjudicator’s statutory task of independently assessing value’.[56]
[56]Reasons [116].

Accordingly, the second proposed ground of appeal must also be rejected.

Conclusion

While we would grant the application for leave to appeal, the appeal must be dismissed.

Name of stage	% of total contract sum	$
Not applicable	Payments are to be made monthly in response to the Contractor’s claims for payment, pursuant to subclause 37.1	As determined by the Superintendent	As certified by the Superintendent

[2016] VSCA 119

26 May 2016