Pay now and argue now – a dual track approach to payment claims containing "excluded amounts"?

One of the purposes of the Building and Construction Industry Security of Payment Act 2002 Act (Vic) is to create a "pay now, argue later" system to enable payment of contractors and suppliers in the construction industry in a timely and efficient manner. This is achieved through a statutory adjudication process for the interim determination of disputed progress payments.

However, in Victoria, the Act prohibits certain "excluded amounts" from being taken into account in calculating progress payment entitlements. The "excluded amounts" include damages relating to latent conditions, time-related costs, changes in regulatory requirements, certain disputed variations and amounts claimed as damages for breach of contract (sections 10B(1) and (2), 14(3)(b), 16(4)(a) and 23(2A)(a)). These types of claims commonly arise on construction projects.

The Victorian Court of Appeal considered the "excluded amount" provisions of the Act in the recent case of Yuanda Vic Pty Ltd v Façade Designs International Pty Ltd [2021] VSCA 44, where the Court held that if a payment claim contains an excluded amount, the courts cannot award judgment to the claimant for any part of the claim even if part of the claim relates to non-"excluded amounts". The High Court has recently rejected an application for special leave to appeal the judgment of the Court of Appeal.

Yuanda highlights the complexities in interpreting the excluded amount provisions, which may impact the way in which claimants issue payment claims and pursue payment. In particular, it might give rise to a scenario whereby claimants consider it in their best interests to simultaneously pursue progress claims along dual tracks:

• the first not under the Act, but only under contractual progress claim provisions, for all claimed compensation during the claim period, including claimed compensation that would otherwise constitute "excluded amounts"; and
• subsequently, a separate payment claim conforming with the requirements of the Act that does not include any "excluded amounts", in order to preserve the right to seek adjudication under the Act in respect of any disputed amounts in the subsequent payment claim.

Such a dual track process is likely to cause project administration difficulties for the recipients of the progress claims, whether they be project principals or lead contractors. This would make administration of progress claims on construction projects more complex and susceptible to error, potentially undermining cashflow, the facilitation of which is a key purpose of the Act.

This article first summarises the key aspects of the judgment, and then discusses the potential practical implications of the judgment.

The Yuanda judgment's finding on payment claims

The judgment in Yuanda considered the following sections of the Act:

• if the recipient of a valid payment claim does not respond with a valid payment schedule in accordance with the Act (within 10 business days, or less if provided by the construction contract), then the claimant is entitled to payment of the full claimed amount (section 15(4));
• the claimant can elect to pursue this entitlement as a judgment debt in court or by making an adjudication application by seeking a determination by an adjudicator (section 16(2)(a)(i) and (ii)); and
• the court must not award judgment in favour of the claimant unless it is satisfied that the claimed amount does not include an excluded amount (section 16(4)(a)(ii)).

Yuanda Vic Pty Ltd engaged Façade Designs International Pty Ltd (FDI) to undertake façade installation works at the "Arch on Collins", 447 Collins Street, Melbourne. FDI issued a payment claim under the Act for $4,584,820.68. Yuanda failed to respond with a payment schedule and FDI elected to recover the value of the payment claim as a judgment debt under section 16(2)(a)(i) of the Act.

At trial the primary judge held (among other things) that the Court can enforce the payment claim provided that it deducted any "excluded amounts" from the claimed amount. Judgment was awarded to FDI on this basis. Yuanda appealed the decision.

A majority of the Court of Appeal overturned the decision of the trial judge. Justices McLeish and Niall held that the Court's role under section 16(4)(a) of the Act is limited to enforcing statutory liabilities (being the amount claimed in the payment claim). Where the payment claim contains "excluded amounts", the Court cannot award judgment or enforce any part of the claims because the identification and quantification of the "excluded amounts" is a matter to be assessed by an adjudicator pursuant to the Act rather than by the Court when enforcing a judgment debt.

In dissent on this point, Justice Sifris held that the primary judge was correct in enforcing the payment claim less the "excluded amounts", on the basis that there is nothing specific in the text of the Act that precludes the Court from doing so.

Adverse practical implications for Victorian payment claims

For a progress claim to be a valid payment claim under the Act, there must only be one progress claim per "reference date". The second progress claim for a single "reference date" will be invalid under the Act and will not create a statutory right to dispute a payment schedule via adjudication. However, construction contracts usually also provide contractual rights to periodic payments, and associated obligations on the recipient of such claims to assess the entitlement and make payment within prescribed time periods.

Contractual payment regimes provide the claimant with a contractual entitlement to payment that arises independent of the Act and statutory adjudication processes. As confirmed by Justice Vickery of the Victorian Supreme Court in Mackie Pty Ltd v Counahan [2013] VSC 694, the existence of two progress claims under a contractual regime does not necessarily mean that the second progress claim is invalid under the Act. If a first payment claim for a reference date is issued on a contractual basis and not under the Act, then a claimant is free to issue a second payment claim for the same reference date, so long as the second payment claim is the first claim validly made under the Act in respect of the relevant reference date. In this scenario, the second payment claim, being the first validly made under the Act for the relevant "reference date", triggers the adjudication and enforcement entitlements under the Act.

Experience on construction projects suggests that it is very common for project participants to incur costs that constitute "excluded amounts". Obtaining compensation for these amounts can be critical for the preservation of cashflow on projects which contributes to the ongoing financial viability of project participants. This might lead prospective claimants to view with trepidation the on-the-ground implication of the judgment in Yuanda. This judgment means that, despite the absence of a payment schedule from the claim recipient, the existence of an "excluded amount" in a payment claim will make the entire claim unenforceable by the courts, who are unable to carve-out the "excluded amounts" and award a judgment debt in respect of only the non-"excluded amounts". This creates a significant cashflow risk for the claimant, but it does nothing to prevent the underlying costs from being incurred by the claimant.

To reduce the cashflow risk while pursuing its compensation for "excluded amounts" under the construction contract, claimants might adopt a dual track claims process by:

• first, issuing a progress claim under the construction contract and independent of the Act. This can be achieved by not including the endorsement that the payment claim is made under the Act, which is a pre-requisite for enlivening the statutory adjudication processes. This progress claim might seek full payment in respect of all amounts, including any "excluded amounts" such as time-related costs; and
• subsequently, issuing a separate progress claim that complies with the statutory requirements of a valid payment claim under the Act, but carving out the "excluded amounts" so that the sorts of problems discussed in the Yuanda decision do not obstruct the claim.

While beneficial to claimants, a dual track payment claim process may create project administration issues for claim recipients (whether principals or lead contractors). Project administration teams are now accustomed to the concept of only one payment claim being submitted per "reference date" (which are often monthly). If the claimant issues two payment claims for a single "reference date", but only the second claim is made under the Act, there is a risk that project administration teams will disregard the second payment claim on the assumption that it is a duplicate or was issued in error. If this risk materialises, and the recipient does not respond to the second payment claim despite it being the only payment claim under the Act for the relevant "reference date", then the recipient would become liable to pay the full amount of the payment claim pursuant to section 15(4) of the Act.

Accordingly, the unintended consequence of the Yuanda judgment might be to increase the administrative burden of managing construction projects by inadvertently promoting the submission of multiple payment claims per month. These consequences would increase costs and decrease efficiency, and might foster litigious attitudes on construction projects without improving cashflow. Such results would be contrary to the overall purpose of the Act.

On 15 October 2021, the High Court dismissed an application by FDI for special leave to appeal the Yuanda decision to the High Court. While the High Court declined the chance to review the decision in Yuanda considering the particular circumstances of the case, the broader implications of the decision, discussed in this paper, remain.