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Decoding the Law: What SMEs should know about builder retention payments

Builders now have clarity on whether retention money claims can be made as payment claims thanks to a ruling by the Supreme Court of Victoria regarding the Building and Construction Industry Security of Payment Act 2002, otherwise known as the SOP Act.

The upshot is that, thanks to the ruling, claims for retention moneys can now be made as ‘payment claims’ under the processes of the SOP Act. One of the interesting aspects of the ruling, however, is the case contrasts with previous authority in Punton’s Shoes Pty Ltd vs Citi-Con (Vic) Pty Ltd [2020]

So how did we get to this new ruling, and how does it differ from the Punton’s Shoes finding?

Background leading to the ruling

JG King Project Management Pty Ltd (JG King), a builder, contracted with Hunters Green Retirement Living Pty Ltd (Hunters Green) to build 49 retirement units across two contracts.

Under the contracts, JG King provided security for completion of the works to Hunters Green in the form of retention moneys which were to be returned to JG King at specified project milestones. The retention moneys were progressively deducted from each invoice issued by JG King. As a result, JG King received lesser amounts from Hunters Green than the invoiced amounts.

For JG King’s ‘Final Payment Claims’ in respect of each contract (Payment Claims), each of the claims stated a ‘current contract claim’, which was the difference between the total amount of the value of the completed works less the total amount paid. The claims also amounted to the final 50 per cent of the retention moneys still being held by Hunters Green.

Hunters Green disputed the Payment Claims. Although an adjudication determination found in favour of JG King, Hunters Green appealed to the Supreme Court arguing (among other grounds) that the Payment Claims did not relate to ‘construction work’ and thus were not ‘payment claims’ under the SOP Act. 

Defining construction work under the SOP Act

The Court found that the Payment Claims were in relation to ‘construction work’ for the purposes of the SOP Act.

The judge stated that the Payment Claims were claims for the unpaid amounts for the completed construction work retained by Hunters Green as security. As amounts had been deducted for retention moneys, Hunters Green had not paid JG King the full amount for the construction work over the course of the contracts.

The Payment Claims, each being a ‘Final Payment Claim’ for the contracts, consequently balanced the accounts between Hunters Green and JG King. Being the unpaid amounts for the completed construction work, they were not “made solely to recover retention moneys”, as submitted by Hunters Green. Rather, there was a direct and obvious connection between the retention moneys and the unpaid amount for construction works.

Additionally, it found retention moneys are not “excluded amounts” under section 10B of the SOP Act, along with the fact it was not relevant that ‘retention moneys’ are not listed in sections 5 or 6 of the SOP Act, as those sections are limited to defining the actual ‘construction work’ and ‘related goods and services.’ As such, they do not identify everything that may be claimed in a payment claim.

This contrasts with Punton’s Shoes and subsequent applications of that decision, which found that the return of retention moneys upon the issue of the Certificate of Practical Completion was not a progress payment entitlement in relation to work carried out by the contractor.  

Identifying the ‘construction work’

In response to an argument that the payment claims did not sufficiently identify the construction work that they related to, the judge found that the Payment Claims sufficiently identified the relevant ‘construction work’ for the purposes of section 14(2)(c) of the SOP Act.

His Honour noted that payment claims must be specific enough to enable its recipient to determine whether to pay the claims or dispute the claims with reasons. This requirement is a “relatively undemanding test”.

Finally, the judge considered that, in the context of their past dealings with each other, JG King had provided sufficient information in the Payment Claims. A reasonable building practitioner in the position of Hunters Green would have understood the Payment Claims as claims for the unpaid amounts for the construction work retained as security.

The key takeaway is that Principals and contractors should be mindful that claims for retention moneys may be made as ‘payment claims’ which engage the processes under the SOP Act.

Holding Redlich, Partner, Kyle Siebel 

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