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Construction and Infrastructure update: Electricity generation (output) can be used to value construction work carried out

Jul 26, 2022

In late 2021, the Supreme Court of Victoria handed down its decision in the case of Lal Lal Wind Farms Nom Co Pty Ltd v Vestas – Australian Wind Technology Pty Ltd [2021] VSC 807 (Decision).

In that case, Her Honour Stynes J had to determine, amongst other things, whether s 7(2)(c) of the Building and Construction Industry Security of Payment Act 2002 (Vic) (the Act) prevented the application of the Act to the relevant construction contract if it had been agreed that the consideration payable for the services supplied under the contract was to be calculated otherwise than by reference to the value of the services.

Consistent with the determination of the relevant adjudicator, Max Tonkin (Adjudicator), Her Honour ultimately held that the Act does apply to the relevant construction contract and that the Act was not excluded by operation of s 7(2)(c).  

The relevant construction contract

Lal Lal Wind Farms Asset Co Pty Ltd, as trustee for the Lal Lal Wind Farms Asset Trust (Asset Co) had originally engaged Vestas – Australian Wind Technologies Pty Ltd (Vestas) and Zenviron Pty Ltd to engineer, procure and construct a wind generation facility consisting of 60 wind turbine generators at the Lal Lal Wind Farm sites at Elaine and Yendon in Victoria (Facility) and certain related works and services (EPC Contract).

Separately, Asset Co and Vestas entered into a contract for the operation and maintenance of the Facility (O&M Agreement).

Asset Co was subsequently replaced by Lal Lal Wind Farms Nom Co Pty Ltd as agent for the Lal Lal Wind Farms Partnership (Principal) under the EPC Contract and the O&M Agreement.

The O&M Agreement is the relevant construction contract the subject of the adjudication and the Decision.

Consideration under the O&M Agreement

The O&M Agreement provided that the following components of consideration may be invoiced by Vestas (our emphasis added):

(a)     the ‘Interim Fees’, which are variable and calculated by reference to output of electricity generated; and

(b)    the ‘O&M Fees’, which comprise:

(i)      the ‘Variable Fees’, which are calculated by reference to the output of electricity generated; and

(ii)     the ‘Fixed Fees’, which provides a minimum payment during the 30-year term, are dependent on fixed integers and could be calculated at the time the O&M Agreement was entered into.

Payment Claim and Adjudication Determination

In July 2021, Vestas served a payment claim on the Principal under the O&M Agreement claiming $6,313,734.49 including GST for works and services performed in respect of the period 27 May 2019 to 1 May 2021 (Payment Claim).

In response to the Payment Claim, the Principal served on Vestas a payment schedule certifying the amount payable as $nil (Payment Schedule). The Payment Schedule set out the Principal’s view that the O&M Agreement is excluded from the operation of the Act by virtue of s 7(2)(c) of the Act.

Section 7(2)(c) of the Act provides that the Act does not apply to a construction contract under which it is agreed that the consideration payable for construction work carried out under the contract, or for related goods and services supplied under the contract, is to be calculated otherwise than by reference to the value of the work carried out or the value of the goods and services supplied.

In September 2021, the Adjudicator determined the amount payable to Vestas was $6,303,933.45 including GST. In arriving at that determination, the Adjudicator determined that the Act did apply to the O&M Agreement and that s 7(2)(c) did not operate to exclude the Act. 

The parties’ submissions on appeal

On appeal, the Principal submitted (amongst other things):

  • that the consideration payable for the services provided by Vestas has been calculated otherwise than by reference to the value of the services, because it is expressed to be calculated by reference to the output of the facility in the megawatt hours;
  • this form of remuneration incentivises Vestas to provide the services in a way which maximises the electricity generated and enables the parties to share the proceeds realised from the Facility’s operation and maintenance; and
  • sharing the proceeds from the generation of electricity is inconsistent with the concept of ‘value’, or ‘valuation’, as used in the relevant provisions of the Act.

In reply, Vestas submitted (amongst other things):

  • a fee calculated by reference to output can be a fee determined by reference to value – those concepts are not mutually exclusive; and
  • the calculation of a fee by reference to output allows for average pricing, thereby avoiding the task of individually assessing the many tasks required to be performed over the 30-year term.

The Court’s Decision

After distilling the relevant authorities, Her Honour found in favour of Vestas, stating at [65] (our emphasis added):

’The Principal would have me infer that consideration expressed to be calculated by reference to output cannot also be calculated by reference to value.  I do not agree. Bearing in mind that the SOP Act is to be beneficially interpreted and that the phrase ‘by reference to’ is capable of indicating a broad relationship between concepts or things it connects, there is no basis to suggest that just because consideration is expressed to be calculated by reference to output it cannot also be calculated by reference to value. Value and output are not mutually exclusive concepts particularly in circumstances like those before me where the parties were in possession of estimates of output at the time they entered into the O&M Agreement.’

Her Honour went to conclude (at [71]) that:

’… the O&M Agreement, properly construed having regard to its text, purpose and context, reveals an objective intention of the parties to account for the value of the Services over the term of the O&M Agreement and that is how a reasonable business person would have understood the consideration payable.’

Take home points

  1. ‘Value’ and ‘output’ are not mutually exclusive concepts, and the value of works performed can be calculated by having regard to output;
  2. A contract which links output (which, by its nature, is variable) to the amount of consideration payable to a claimant does not automatically contravene s7(2)(c) of the Act; and
  3. The Act is remedial and should be given a liberal interpretation within the confines of the actual language employed and what is fairly open on the words used.

More information

For information about this case or for advice, please contact:

Darren Cain, Principal Lawyer and
Head of Construction and Infrastructure
(03) 8600 8835 or dcain@kcllaw.com.au

Dominic Brown, Senior Associate
(03) 8600 8851 or djbrown@kcllaw.com.au

Author

This Construction and Infrastructure case note was authored by Dominic Brown, Senior Associate.

Note: This update is a guide only and is not intended to constitute legal advice.