‘On Account’ Is Not a Safety Net

Court Finds Approved Variations Are Final, Not Provisional

An important decision of the NSW Supreme Court earlier this year dealt with the meaning of “on account” payments.

In Calibre Construction Group Pty Ltd v Kaloriziko Pty Ltd [2025] NSWSC 593, the Court found that once a variation is approved and paid, it cannot be challenged on the basis of being “on account.”

The decision challenges the long-standing industry assumption that payments under construction contracts are always “on account only.”

What happened

The Builder entered into a $31m design and construct contract with a Developer in 2017 for a mixed-use development in Ryde. Based on an AS 4902-2000 agreement, the project comprised four towers and approximately 100 units.

Included in claims made by the Builder were claims for retention, the sum of $270,000 for unpaid variations and approximately $250,000 for the balance of the contract price.

Relevantly, the Developer disputed the claims for variations and by cross claim, sought to recover amounts previously paid for variations, along with damages for delay and defective work.

The retention

Clause 5.5 imposed a contractual obligation on the Developer to:

“appropriate and set aside as a separate trust fund a sum equal to that part of the sum certified in any interim certificate as due in respect of work completed which the [party in the Developer’s position] is entitled to retain” [15]

Despite clause 5.5 of the Contract; the Developer did not receive or set aside any cash retention in a separate trust fund.

Instead, the Developer financed the project through a loan that covered only 90% of each progress payment. Because of this, the Developer did not receive or set aside the remaining 5%, which was meant to be held as retention for the Builder.

Although the Builder was paid 95% of each claim, the Developer never actually held the retained 5% in cash or in trust, despite the contractual requirement to do so.

The Builder referred to an affidavit relied upon by the Developer in separate proceedings, in which the Developer stated it had retained retention monies claimed by the Builder.

Aside from the Developer’s claims for setoffs arising from defects, delays and disputes over variations; the Developer accepted that it was contractually liable to repay the retention to the Builder.

The Builder argued, however, that:

• The Developer was not only required to retain the funds but under the contract the developer was required also to hold those funds in trust under the contract for the Builder.
• The issue was not about withholding, it was about the Developer’s duty to hold that money in trust and that the Developer was in breach of that duty.

In addition to pursuing the Developer directly, the Builder also raised claims against individuals and related entities for knowing involvement in the breach of trust.

The Court found that:

• No trust was created under clause 5.5 because no actual money or asset was set aside for the Builder.
• Without a specific fund or identifiable asset linked to the trust; the clause had no practical effect.

Without a trust, there could be no breach of trust and therefore no liability for those allegedly involved in such a breach.

• The Developer was contractually liable to repay the retention but claims against individuals for breach of trust failed due to the absence of a trust asset.

Variations

With respect to the variation claims, between November 2017 and September 2020, the Builder claimed and received $1.38 million for variations. The Developer later disputed nine of those variations, seeking to recover $689,922 by way of a crossclaim.

Separately, the Builder claimed $270,434 for unpaid variations. The Developer disputed 15 of those, amounting to $256,409.41.

During the project the Developer approved and paid for some variations and approved others without payment. For example, in Variation Claim 19, the Builder submitted a detailed cost document that was stamped “Approved” and signed by the Developer’s representative.

However, the Developer later argued that these approvals were only “on account,” not a final agreement to pay beyond the $31 million contract sum.

In support of its position, the Developer relied upon a sentence in clause 37.2 of the contract to contend that any “pricing” by the Developer’s Representative under clause 36.4 was provisional and “on account” only.

Clause 37.2 provided relevantly:

“Subject to subclause 37.6, the [Developer’s Representative] shall within 15 Business Days after receiving the progress claim pay to the [Builder] the balance of the progress certificate.

If any set-off under clause 37.6 produces a negative balance, the [Builder] shall pay that balance to the [Developer] within 7 days of receiving written notice thereof. Neither a progress certificate nor a payment of moneys shall be evidence that the subject [Work Under Contract] has been carried out satisfactorily. Payment other than final payment shall be payment on account only.” [106]

The Developer argued that approvals and payments for variations were only “on account,” meaning they could be revisited later. But the Court rejected this argument. It found that once the Developer’s representative directed the Builder to carry out variation work under clause 36.1 and then priced it under clause 36.4, the variation was final.

The Court found that clause 37.2, which refers to progress payments being “on account,” had not role to play in the proper interpretation of clause 36.4 of the contract [107].

In considering the Developer’s “on account argument” the Court examined the variation provisions in clause 36 and held that:

• Under clause 36.1, the Builder could only carry out variation work if directed in writing by the Developer’s representative. [93].
• The contract defined “direction” broadly; it could include an agreement or approval [95].
• A “variation” meant work that changed the scope, materials or quality of the original contract and had to be approved through specific steps [96].
• Once directed, the Builder was required to perform the work and the variation would then be priced and valued under clause 36.4 [96]. Otherwise, the directed work was to be “priced” before the work was performed.

In particular the Court said:

‘Either way, there is no suggestion in any of these provisions that such “pricing” was to be in any sense provisional. On the contrary, it was to be done “as soon as possible;” and in the case of cl 36.1(b) directed work, after the work was done.’ [101]

‘What cl 36.4 required the Developer’s Representative to do was to price “each variation;” not something which may or may not constitute a variation.’ [101]

“Reasonable persons in the position of the parties would not understand that the effect of the words used in these provisions to be that the Developer’s Representative could, first, give a direction to the Builder under cl 36.1 to vary the Work Under Contract and then price the variation on the basis set forth in cl 36.4(a), but leave it open to the Developer later to contend that there has been no “variation” [109].

“Having given the direction under cl 36.1 to the Builder to vary the Work Under Contract in any one of the ways specified in the sub-cll (a) to (e) of cl 36.1, and then having “priced” that work under 36.4, it was not open to the Developer then to argue that the work in question did not constitute a “variation”.’ [110]

Key takeaways

With respect to retentions the judgment provides a reminder that:

• Developers and Principals must do more than just deduct retention amounts – they need to actually set aside the money if the contract says it should be held in trust. Simply deducting the amount from payments is not enough.
• Builders should check that retention clauses are enforceable and that the Developer is following through in practice.
• Contract drafters should clearly state whether retention is to be held in trust and include steps to ensure the funds are properly identified and protected.

With respect to the “on-account argument”, the Court made clear that:

• Since the developer had approved and, in many cases, paid for the disputed variations, it could not later claim those approvals were not binding.
• The contract did not allow the Developer to approve and price a variation, then argue it was not a variation after all.
• Once a variation is:
  • directed under clause 36.1,
  • priced under clause 36.4,
  • approved by the Developer’s representative, it cannot later be disputed as merely provisional or “on account.”

The direction, approval and pricing process under clause 36.4 was treated as final, not subject to later revision.

The key message of the case is that once a variation is directed and priced under the contract, Principals and superintendents cannot later argue that approved variations were provisional unless expressly allowed by the contract.

For more information on how to protect your entitlement to variations, please contact David Glinatsis at Kreisson.