Ever since the 2007 amendments to the Building and Construction Industry Security of Payment Act 2002 (Vic) (Act) came into force, there has been an ongoing tension between the right of a respondent to back-charge for the estimated cost of defects against a payment claim and whether such a step falls foul of the ‘excluded amounts’ regime under the Act.
The Supreme Court of Victoria has recently given some welcomed and long awaited clarity on the meaning of “excluded amounts” under section 10B of the Act and, most importantly, whether that prevents a respondent from setting-off the estimated cost of rectifying defects against a claimant’s payment claim.
In summary, section 10B(2)(c) of the Act defines an “excluded amount” to include ‘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’. That section does not sit well with the adjudicator’s obligation under section 11(1)(b) of the Act to value the construction work “having regard to the estimated cost of rectifying any defects” where the governing construction contract makes no express provision in that regard.
These provisions of the Act have caused much uncertainty in the building and construction industry with regard to whether an adjudicator is prevented from taking into account the estimated costs of rectifying defects because those costs are “excluded amounts” under the Act or whether the adjudicator has the statutory obligation to have regard to those estimated costs in valuing the construction work under the payment claim.
In Maxtra Constructions Pty Ltd v Joseph Gilbert [2013] the Supreme Court of Victoria has determined that in the absence of an express right under the construction contract with respect to valuing construction work:
- The estimated costs of rectifying defects are not “excluded amounts” within the meaning of section 10B of the Act; and
- An adjudicator has an obligation under section 11(1)(b) of Act to take the estimated costs of rectifying any defects into account when valuing the construction work.
Both claimants and respondents should take careful note of the Supreme Court’s ruling in Maxtra Constructions because it highlights the important distinction between a claim for damages, which constitute ‘excluded amounts’ under section 10B of the Act, and a claim for ‘estimated’ costs of rectifying defects, which an adjudicator is obliged to take into account when valuing the construction works.
It should serve as a timely opportunity for clients to undertake a ‘health-check’ of their construction contracts to ensure that any express right to back-charge for the estimated cost of rectifying defects is properly drafted to ensure that this right is not lost when valuing construction work under a payment claim issued under the Act.
More information
For more information, or to discuss any security of payment issues you may have, please contact Darren Cain, Principal Lawyer and Head of Construction and Infrastructure, on (03) 8600 8835 or dcain@kcllaw.com.au.
Note: This update is a guide only and is not intended to constitute legal advice.