In Victoria a respondent to a claim made under the Building and Construction Industry Security of Payment Act 2002 (Vic) (Victorian Act) cannot deduct liquidated damages (owing by a claimant to a respondent) from an amount claimed by a claimant.
Under the Victorian Act and since the decision in Seabay Properties Pty Ltd v Galvin Construction Pty Ltd  VSC 183, liquidated damages are deemed ‘excluded amounts’, and cannot be considered by an adjudicator in determining the amount to be paid by a respondent to a claimant.
By contrast, the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW Act) does not expressly prohibit an adjudicator from taking liquidated damages into account in determining a progress payment. This has in the past allowed us when acting for our NSW clients to seek to ‘back-charge’ for liquidated damages as part of the assessment process under the NSW Act.
The recent case of Hutchinson Pty Ltd v Glavcom Pty Ltd  in the New South Wales Supreme Court has provided some handy guidance for our NSW based clients on what an adjudicator must do when confronted with a set-off sought by a respondent for liquidated damages (or other such amounts).
In Hutchinson v Glavcom the subcontractor made a payment claim under the NSW Act against its head contractor. In its payment schedule the head contractor sought a set-off for liquidated damages.
The NSW Supreme Court found that the head contractor was not entitled under the NSW Act to deduct liquidated damages from the progress payment for the following reasons:
- In calculating the progress payment the adjudicator must, under the NSW Act, calculate that amount in accordance with the terms of the relevant construction contract.
- If the relevant construction contract does not contain any express provision for the calculation of the progress payment, then the adjudicator must calculate the progress payment on the basis of the value of construction work carried out only.
- The construction contract between the subcontractor and the head contractor did not contain any express provision permitting liquidated damages to be deducted from a progress payment.
For our clients that are respondents (typically principal developers and head contractors) the lesson learnt from the recent decision in Hutchinson v Glavcom is to ensure that their construction contracts contain clauses that expressly provide for a right of set-off (for liquidated damages or other amounts) in calculating a progress payment. This will require some careful drafting so as to ensure that the clause in question survives attack and does not contravene the ‘no contracting out’ provisions of the NSW Act.
Note: This update is a guide only and is not intended to constitute legal advice.