20 July, 2016
The recent decision of the Victorian Court of Appeal in the case of SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd [2016] VSCA 119 has provided clarity as to what is considered a “method for resolving disputes” for the purposes of section 10A(3)(d)(ii) of the Building and Construction Industry Security of Payment Act 2002 (Vic) (the Act). The Court decided that mediation is not a binding process and therefore is not a method for resolving disputes such as to exclude variations from adjudication under the Act.
The Court also confirmed that adjudicators are not obliged to apply the valuation for a variation certified by a superintendent but instead must form their own opinion as to the value of the variation.
Background
SSC Plenty Road Pty Ltd (SSC), as principal, engaged Construction Engineering (Aust) Pty Ltd (Construction Engineering) to design and build a shopping centre complex in Victoria for the contract sum of $35,554,985 (plus GST). During the construction phase, Construction Engineering brought an adjudication under the Act, seeking payment of disputed variations, among other things.
SSC applied to the Supreme Court for judicial review of the adjudication determination. The two main issues in contention were:
a) whether the contract provided a method of resolving a dispute; and
b) whether the adjudicator had the power to determine a price for work under the contract which was different to that certified by the superintendent under the contract.
Where a contract provides a method for resolving disputes and the consideration under the contract exceeds $5 million (or $150 thousand where the total value of variations claimed exceed 10 per cent of the contract price), disputed variations will be excluded from adjudication under the Act. SSC submitted that this meant that the adjudicator had erred in including the variation in his determination.
The relevant dispute resolution clause in the contract provided that if disputes could not be resolved between the parties, they were to be resolved by mediation and failing that, either party could pursue its rights at law. The trial judge held that the relevant clause did not provide a method for resolving disputes and therefore dismissed SSC’s claim.
The trial judge also considered whether contractual provisions which in effect gave a superintendent the power to price provisional sums and variation works meant that an adjudicator must adopt the superintendent’s pricing decisions. Regarding this second question, the trial judge held that the adjudicator could not merely accept SSC’s invitation to adopt the superintendent’s certificate as to the value of the works as to do so would be the adjudicator delegating their task to the contractually appointed superintendent.
Decision on appeal
The Victorian Supreme Court of Appeal, in a unanimous joint judgment, dismissed the grounds of appeal.
The Court engaged in an analysis of what was required for there to be a method of resolving disputes for the purposes of section 10A of the Act.
Relevantly the Court held:
The language used in the statute refers to a ‘method of resolving disputes under the contract’. In our opinion, the meaning of ‘method of resolving disputes’ requires a method that will result in an actual resolution of the dispute, rather than just offering a forum for the discussion of the controversies between the parties, which may or may not lead to their resolution. The word used is ‘resolving’, not ‘addressing’.1
1. [2016]VSCA119,[54] 2. [2016]VSCA119,[71]
As mediation only provides a forum for discussing controversies without any guarantee of a resolution being reached at the end of the process, it therefore does not fit the definition outlined by the Court. The implication of this definition is that only a dispute resolution clause which involves referring disputes to a process that secures the certainty and finality of a binding amount, such as arbitration, will be held to be a method of resolving disputes for the purposes of section 10A. This meant that the clause in the contract which required the parties to mediate was not a method of resolving a dispute and therefore the variations were claimable variations under the Act.
The court also addressed the question of the role of the adjudicator and whether an adjudicator is bound to accept the decision of a superintendent as to the price of the variation works. In this regard, the Court held that the role of the adjudicator is statutory and not contractual unlike the role of the superintendent. Therefore the adjudicator was not constrained by the requirements of the contract, but rather operated within the requirements of the statute which prevails over the terms of the contract. In the words of the Court “the role of the adjudicator is strictly statutory. The issue is not what is provided for in the contract, but what is provided for in the Act.“2
Pursuant to the Act, an adjudicator is required to determine the amount of a progress payment. A contractual provision that requires an adjudicator to adopt a superintendent’s price is inconsistent with the statutory requirement that the adjudicator determine the amount of the progress payment. SSC’s appeal ground that the adjudicator erred in not adopting the superintendent’s valuations was therefore dismissed as the adjudicator was statutorily empowered to independently assess the value of the works.
WHAT THIS MEANS FOR YOU
This case illustrates the importance for principals of carefully drafting their contracts to ensure that the dispute resolution clause contains a mechanism which will bring finality to a dispute if the principal wants to prevent disputed variations from being the subject of adjudication under the Act. While mediation does play an important role in the resolution of many disputes, it will be insufficient on its own to prevent disputed variations from being claimable variations under the Act in any dispute over progress payments.
For contractors, the Court’s decision raises the possibility under existing contracts of including appropriate variations in progress payments where the contractual dispute resolution clause does not provide a binding method for resolving disputes which provides finality.
The Court’s decision also illustrates that adjudicators do have the power to make determinations independent of what the superintendent has determined the value of the works to be, notwithstanding that a contract provides for the works to be priced by the superintendent.
For further information, please contact:
Timana Hattam, Herbert Smith Freehills
timana.hattam@hsf.com