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What is a Pay When Paid Provision?

CASE NOTE: MAXCON CONSTRUCTIONS PTY LTD V VADASZ [2018] HCA 5

On 14 February 2018, the High Court of Australia handed down its decision in the case of Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5 (which was the same time that it handed down its decision in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4).

The case concerned an appeal by Maxcon Constructions of an adjudicator’s decision under the Building and Construction Industry Security of Payment Act 2009 (SA) (the Act).

The High Court dismissed the appeal and followed the decision in Probuild, and said that the South Australian Supreme Court does not have jurisdiction to quash an adjudicator’s decision for non-jurisdictional errors of law.

The decision also outlined the importance of ensuring that a construction contract does not include “pay when paid” provisions.

WHAT THE CASE IS ABOUT

In summary:

1. Maxcon Constructions (the Builder) entered into a subcontract agreement with Mr Vadasz t/as Australasian Piling Company (the Subcontractor) in relation to piling works (Subcontract);

2. The Subcontract required for the Subcontractor to provide security to the value of 5 percent of the Subcontract sum (Security);

3. Clause 11(e) and Schedule E of the Subcontract stated that the Security was to be released as follows:

  • 50% “90 days after CFO is achieved”; and
  • 50% “365 days after the date of CFO”.

4. CFO was defined under the Subcontract as “the certificate of occupancy and any other Approval(s) required under Building Legislation which are required to enable the Works lawfully to be used for their respective purposes in accordance with [Maxcon’s] Project Requirements”;

5. On 25 February 2016, the Subcontractor served a payment claim for $204,864.55 (including GST);

6. On 8 March 2016, the Builder served a payment schedule, which scheduled the amount of $141,163.55, deducting a retention sum and administrative charges;

7. The Subcontractor applied to adjudication, where the adjudicator determined the adjudicated amount as the amount claimed by the Subcontractor; and

8. The adjudicator concluded that clause 11(e) and Schedule E to the Subcontract amounted to “pay when paid” provisions and were ultimately ineffective by operation of sections 12(1) and 2(c) of the Act (which essentially outlines that “pay when paid” provisions are of no effect for the purposes of the Act).

HIGH COURT’S DECISION

The High Court confirmed that a “pay when paid” provision will be apparent where there is a provision in a contract that “makes the liability to pay money owing, or the due date for payment of money owing, contingent on or dependent on the operation of another contract” (emphasis added).

The High Court determined that clauses 11(e) and Schedule E amounted to “pay when paid” provisions for the following reasons:

1. The definition of “Building Legislation” for the purposes of “CFO” included both the Development Act 1993 (SA) and the Development Regulations 2008 (SA);

2. Section 67(1) of the Development Act states that a person cannot occupy a building until a certificate of occupation has been issued;

3. Regulation 83(2)(a) of the Development Regulations states that, in order to obtain a certificate of occupation, a statement of compliance is required (which includes a statement by the owner that documents such as contract documents comply with the relevant development approval);

4. The issue of the certificate of occupancy was dependent upon:

  • the Builder certifying that building work had been performed in accordance with the issued documents, including the head contract between it and the owner; and
  • completion of the whole of the project in accordance with the head contract.

5. The due date for payment of the retention sum was therefore dependent on something unrelated to the Subcontractor’s performance (i.e. it was dependent on completion of the head contract).

WHAT TO TAKE AWAY

The decision highlights the importance of ensuring that “pay when paid” provisions are not contained in a construction contract.

These provisions may inadvertently be included in your contract. For example, does your subcontract state that a defects liability period commences on completion of the works under the head contract?

This may in turn result in a “pay when paid” provision as the release of the balance of security is ordinarily contingent upon expiry of the defects liability period.

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